Over the past six months the market has plummeted from all-time highs to a place where people believe that the worst is over. But is that true? Where is the market headed? Are my investments safe?
In a free-wheeling discussion I had with some market experts we made some sense of the mayhem already caused and tried to arrive at a consensus. The discussion centred around the global economy, how the Indian economy responded and where the earnings growth would come from if the market had to recover. This is the second of the articles and gives us a perspective on what’s happening in India and what will drive earnings growth.
India has displayed remarkable resilience in recovery after a Covid-induced slump in growth. We have managed to keep price pressure under check at a time when even developed nations are grappling with runaway inflation. The latest GDP data showed real growth in FY22 exceeded the pre-pandemic (FY20) level by 1.5%, private consumption by 1.4% and fixed investment by 3.8%. On a year-on-year basis, the economy grew 8.7% in FY22 from -6.6% in the previous year. Inflation in India at 7% is not exorbitant like US.
The developed world is moving from low to high inflation and it is in such times that we have managed to keep inflationary pressure under check
Chief Economic Advisor,
Government of India
Food and fuel are the two main sources of inflation in India and prices of most food items have shot up in recent months due to supply disruptions caused by Russia's invasion of Ukraine and erratic weather.
Inflation in the US, for instance, hit a fresh 40-year high of 8.6% in May while India’s retail inflation scaled an 8-year peak of 7.79% in April. Government is taking various measures to tame the inflation like cutting taxes on fuel and imposing taxes to curb exports of food and commodities like steel.
With 75% of India's price acceleration expected to come from food items, the focus is on the success of monsoon rains to boost production and replenish food stockpiles, which would ease supply constraints and anchor price expectations.
Rising interest rates shouldn’t hurt Indian corporates significantly since massive deleveraging of corporate balance sheets across sectors has taken place.
There is still a lot of over-capacity in the automotive sector, which will be very circumspect on expansion, while sectors such as chemicals, pharmaceuticals, consumer goods, paints, electronics and packaging are displaying high utilisation.
Although a massive deleveraging of corporate balance sheets has taken place, there is definitely a capex uptick over FY22, but the challenges include high levels of inflation, leading to increase in capex costs, and this would lead to slow and calibrated capex plans in FY23
Mimi Partha Sarathy
Sinhasi Consultants Pvt. Ltd.
Many Indian companies have posted margin compression due to price hike in raw material. But in most sectors, companies have been able to pass on the raw material price increase to the customer but not commensurately increased their profits. So margins have compressed but absolute gross profit per unit has held up. Volumes have been impacted due to various reasons. But the same is not applicable to banking & financial services.
Earnings deceleration may prevail in commodity sectors i.e., Steel & Aluminium as exports have been compromised (eg. 15% export duty on steel) to favour domestic markets and keep inflation down. There will also be margin contraction in FMCG. The FMCG sector has been going through challenging times due to very high commodity inflation in the last one-year compelling FMCG companies to take price hikes to the tune of 10-15% with margin reduction of 2-5%. This margin pressure will continue in Q1FY23 given that commodity inflation was persistent until mid-June and volume growth would also be flattish.
So in our view FY22-23, earnings growth is going to be driven by Banks, NBFCs, Reliance and Autos
It may take another 6-12 months for the market to settle down. Until then it will remain volatile, and we may see a further 5% -10% correction from here.
However, market cycles revive much earlier than the actual economic revival, so we must add during dips over the next 6 to 12 months and remain patient. Historically, market correction due to macro headwinds as well as heavy FII selling have turned out to be an opportunity to build portfolios with a long-term view.
It is impossible to time the market, and no one can predict the bottom. However, every sharp dip is an opportunity to add into equity depending upon your financial plan and asset allocation. Remain invested in this highly volatile market led by macro headwinds and continue your SIPs and STPs as it is.