Recession in advanced economies would significantly bring down the imported inflation risk for India as commodity prices cool.
The post-Covid world had just begun to return to normalcy when it slammed into inflation and recession. Massive lay-offs at MNCs further shrouded the future in more uncertainty. However, in the midst of all this, Indian indices Sensex and Nifty are making new highs in November 2022. This has left investors confused.
How is the Indian market defying all the global risks?
The reality is that stock market sees what many don’t and this astounds investors. Investors focus on the media chatter while markets focus on expected future outcomes. Going by markets’ future-focussed thinking, CY22 has been a year of many corrections. And, corrections are always positive for the future… isn’t it?
Also read: Sensex, Nifty at new highs: How different is this uptrend from the last peak?
The first correction in year 2022 has been the resetting of the US Federal Reserve policy stance. US has been enjoying close to 0.25% to 0.50% rates for more than 12 years because rates were cut sharply after the global financial crises of 2008 when the Fed brought rates down from 4.75% to zero. With the last six consecutive rate hikes in CY22, federal rates have gone back to 3.75% to 4.00%, marking an end to the era of quantitative easing. This levels the playing field for the global flow of liquidity.
The second consequential event has been equites undergoing the reality test of valuations. Some of the major indices, which had enjoyed their best run-ups over the last five to ten years, saw massive correction--both Nasdaq and Hang Seng fell by ~30%. At the same time, Indian markets have hardly seen any fall.
Going by the age-old beliefs in stock markets that ‘what doesn’t correct during bad times, leads the good times’, the recent relative outperformance of Indian bourses over the last 18 months has drawn attention away from the US and China to India. Many global thinkers, economists and stock-market experts believe that India will be the big bull market of this decade.
Corporate-earnings booster
The third positive has been the comeback of corporate earnings growth in India across major sectors. In FY22, corporate earnings-to-GDP ratio bounced back to a decade high of 4.5%. While lay-off is the buzzword across advanced economies and MNCs, domestic companies in India are in a capex mode, and economic forums are arguing if India will grow at 6.5% or at 7.5%. Rise in corporate earnings brought correction in equities as reflected by the fall in Nifty 50 PE multiples. Nifty’s Price-to-Earning (PE) Ratio was ~35 in November 2020, today, in November 2022, it stands at ~22. This goes on to justify that even though the index is at an ATH, valuations have corrected by almost 40% and this is why markets look attractive, despite being at ATHs. These valuations are similar to what they were after the Covid corrections--March 2020, Nifty PE was at ~21.
Fourthly, recession in advanced economies would significantly bring down the imported inflation risk for India as commodity prices cool. If we consider that India imports more than 80% of its energy requirement, then falling crude oil prices will help bring the country’s trade deficit down and this can have a cascading impact on varied sectors of the economy.
Fifthly, with global supply chains moving away from China to other geographies, India could emerge as a manufacturing hub. Currently, China is the number one manufacturing hub responsible for around one-third of the global manufacturing output. But years 2020 and 2021 have shown the world what over dependence on China can do.
Finally, with the series of rate hikes taken by central banks over the last 11 months in CY22, recession is likely to emerge as the bigger risk than inflation. And, we have seen what happens to stock markets when monetary policy turns dovish and focus returns to growth–whether during the global financial crises or during the pandemic.
The big picture is that by the end of this decade, India's GDP is anticipated to more than double from over $3.5 trillion to over $7 trillion. According to a Morgan Stanley analysis, the nation's economy and stock market are expected to grow to be the third-largest in the world in this decade. And, following the Indian equities’ data of over the last two decades, Nifty and Sensex have never seen a correction or a consolidation phase for more than 15 months. And, between August 2021 and November 2022, it has already been a period of 15 months with almost 0% returns from Nifty and Sensex.
Viewing policy actions and market cues optimistically, the corrections of 2022 offer investment opportunities. Also, we can soon see a reversal in FIIs’ stance and flows, back in favour of Indian equities. With DII flows steadily increasing, there would soon be a scenario of buyers outweighing sellers, taking markets to newer heights.
Of course, there will be short to medium-term volatility and equities are never without risk. Therefore, it’s all about making informed choices for the long term.
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