The Indian economy has grown 9.7 percent (YoY) in 1HFY23, as compared to 13.7 percent growth recorded in 1HFY22. Given the consensus growth forecast for FY23 is around 7 percent, the implied growth rate for 2HFY23 is close to 4 percent (YoY).
Further the forecast for FY24 are veering around 6.2 percent (ranging from 6 percent to 6.4 percent), given the rising global slowdown hitting exports further; lagged impact of monetary tightening likely hitting in 1HFY24; investments slowing down on poor demand growth visibility and persisting high inflation further hitting domestic savings.
Also Read | Cooling prices give India space to slow interest-rate hikes
It is therefore likely that the Indian economy might grow at less than 5 percent for the next four quarters. This will be the period that may see a very high decibel drama in the global theatre. The current trends indicate that the monetary tightening by the US Fed and other global central bankers has already started to impact the demand and employment. The consumer demand, housing starts, and high paying jobs are showing a distinct downward trend. Similar trends are also visible across Europe. Easing bond yields, despite likelihood of further hikes and tightening by the central bankers, at least till 1Q2023, is clearly indicating a notable slowdown in the global economy in 2023.
The long term growth trend (5yr CAGR) continues to remain below par.
2QFY23 GDP data had some trends that should worry markets. For example—
- Industry sector growth contracted by 0.8 percent, mainly led by decline in manufacturing activity (-4.3 percent).
- Government consumption contracted 4.4 percent, while private consumption was also lower YoY as well as sequentially.
- Exports continued to slow for the seventh consecutive quarter. 2QFY23 export growth of 11.5% was the lowest post pandemic. Net export is likely to come under further stress given the looming global slowdown, which would likely dent global demand further.
- Services growth (9.3 percent) was also lower YoY (Q2FY22-10.2 percent) and sequentially (1QFY23-17.6 percent), mainly dragged by community and defence services.
- Subsidy disbursement was poor, while tax collections were strong, resulting in lower GVA growth of 5.6 percent.
- The Gross Domestic Savings (GDS) at 26.2 percent of GDP in 1HFY23 is the lowest in two decades.
- The April-October 2022 fiscal deficit is reported at 45.6 percent of FY23BE. This materially higher as compared to 36.3 percent in the similar period of FY22. This number read with higher tax collection, lower government consumption, lower subsidy distribution and sharp rise in government investment implies that 2HFY23 could see slower government capex.
Besides the economic data, the market fundamentals are also indicating headwinds for markets in the next few months. For example—
- The present spread between 10yr US Treasury yields and 10yr GOI Treasury Yield is ~3.4 percent, which is lowest since the global financial crisis (2009). Given the negative BoP forecast for FY23, the USDINR may continue to be under pressure, further narrowing theoretical arbitrage for foreign USD investors. The foreign portfolio flows could be impacted if this spread sustains or narrows further.
- NSE500 EBITDA Margins at 15.7 percent during 2QFY23 were the lowest in ten quarters. Thus despite 29 percent YoY growth in sales, NSE500 PAT declined ~3 percent.
- Net FPI selling in YTDFY23 has declined to ~$3bn; but the domestic flows are showing some signs of tiring. With domestic savings declining and household finances under pressure, the domestic flows may likely be moderate in the next few months at least.
- Nifty is trading at ~10 percent premium to its long term average one year forward PE multiple. Since, the current estimates of EPS are elevated and likely to be downgraded further, this premium could actually be higher.
I shall continue to remain cautious and not get swayed by the recent up move in the markets. I believe that the market shall provide much better entry points in the next few months. Insofar as my current portfolio is concerned, I am maintaining my standard asset allocation for now (see here). However, I would like to raise some tactical cash if the markets rally further from the current levels.
Disclaimer: The author does not provide any investment advisory, portfolio management, equity research services to anyone.
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