India likely to go back to real GDP growth trend of 6.5% with these three drivers of economy firing: Aditya Birla Sun Life AMC's CIO

GDP Growth, Economy

Mahesh Patil, CIO, Aditya Birla Sun Life AMC

In 2021, global equity markets attained new all-time highs driven by strong corporate earnings growth even in the face of COVID restrictions, supply chain disruptions, rising oil prices, and higher labour costs. Headline valuations ended at a 15-35 percent premium to long-term averages across the US, Eurozone, and emerging markets. India too was amongst one of the best-performing markets globally.

Going forward in 2022, global equity markets are likely to continue climbing a wall of worries on a number of fronts – growth peaking out, high inflation, US Fed accelerating its pace of tapering and rate hikes, slowdown in China, new COVID variants, high valuations, etc.

India, on the other hand, has come out of the second COVID wave and is catching up with the rest of the world. Its economy is recovering quickly as evidenced by strong macro data: better-than-expected GDP growth, PMI consistently in expansion zone, improved core sector growth, GST collections of above Rs 1.3 lakh crore for the sixth consecutive month and falling unemployment rate.

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Mahesh Patil

Chief Investment Officer|Aditya Birla Sun Life Asset Management Company

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Going forward, over the next three years, we believe India is likely to go back to its real GDP growth trend of around 6.5 percent with all three drivers of economy firing.

a) Consumption: Discretionary consumption is picking up after COVID and should sustain given a young demographic with rising incomes and aspiration levels.

b) Investment: Real estate is at a beginning of a new cycle, private sector investment is expected to pick up, and government spend on infrastructure development is expected to remain strong. India should continue to see strong FDI (foreign direct investment) inflows.

c) Exports: Given the robust global economic recovery, exports have already recovered, and outlook remains positive. IT service companies have good tailwind and China+1 strategy is helping sectors like textiles, chemicals, manufacturing, etc.

Also, India's external debt position (import cover, external debt/GDP) is superior to other emerging markets. Hence, the country is better prepared for policy tightening globally in 2022 and beyond.

On the COVID front, the new Omicron variant is spreading rapidly globally, and we are seeing a rise in cases in India. However, this third wave can be expected to peak out as quickly as January-February. Hence, we do not anticipate a major impact on corporate earnings.

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Corporate profit to GDP is showing a turnaround and India seems well-positioned to enter a new profit cycle. Most of the drag on corporate profits in the past few years was due to banking and telecom sectors, which should see an improvement in profitability. And profitability of secular themes like technology, private banks, consumer, NBFC, etc, has anyways been on an uptrend. Overall, we believe earnings are likely to grow at 15 percent compound annual growth rate over the next three years, which is higher than the long-term average.

Given the rally in markets in 2021, easy money has already been made. 2022 can be looked at as a year of transition as excess liquidity gets withdrawn and interest rates inch up. We have already seen FII (foreign institutional investment) outflows from emerging markets including India over the past couple of months and Indian equity markets have corrected by around 10 percent. Last year, markets saw a one-way risk-on rally due to high liquidity. However, in 2022, markets are likely to be more discerning and stocks will be driven by fundamentals.

With a slightly incremental correction, markets are expected to start looking reasonable from a valuation perspective. Hence, investors can expect moderate returns along with stock-specific rally in the short term. Portfolios having a slight tilt towards domestic cyclicals should do well in 2022. Also, while market returns may be modest, the breadth will continue to improve as the domestic recovery gathers momentum, thus providing opportunities for active funds to generate alpha.

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In summary, we can look at the markets in two parts – firstly, on a short-term basis, correction should be looked at as an opportunity to add equity exposure but should be phased out over the next few months as the markets adjust to the policy change globally. Secondly, as India is continuing on the road to recovery, on a medium to long-term basis, we remain positive on equities and expect markets to continue to scale higher. Overall, we believe Indian equity markets can give returns slightly below compound annual growth for earnings over the next three years.

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