The global economy enters 2022 in a weaker position than previously expected. As the new Omicron COVID-19 variant spreads, countries have reimposed mobility restrictions. Rising energy prices and supply disruptions have resulted in higher and more broad-based inflation than anticipated. Further, the ongoing retrenchment of China’s real estate sector and slower-than-expected recovery of private consumption should result in growth moderation from 5.9% in 2021 to 4.4% in 2022.
Additionally, there are several risks that are at the forefront of investors minds which has resulted in sharp correction over the last few months 1) Global bond yields have hardened on inflation concerns; 2) Oil prices have risen sharply on growing geopolitical tensions; 3) Escalation in Russia-Ukraine conflict; 4) Domestic inflation is proving sticky and may have upside risks and 5) Expensive valuations across sectors and stocks.
Notwithstanding a highly transmissible third wave driven by the Omicron variant of COVID-19, Indian economy is expected to grow at 9.2% for 2021-22 (highest amongst all large economies), slightly above the GDP level of 2019-20. Additionally, the growth-oriented focus of government, continuity in policy/strategic direction of economy and stability in taxation were the key positives of Budget-2022.
Post touching record highs in mid-October 2021, stock markets have been in correction phase on the back of expected tightening of interest rates by FED as well as continuous selling by FIIs (1.4 lakh Cr worth of cumulative selling in the last 4 months). Further, on the back of lower than expected Q3’22 results across most sectors, deteriorating global geopolitical conditions and expensive valuations, indices continue to be under pressure. However, Nifty is down by only ~7% from 52-week high whereas there is serious pain in small & mid-cap stocks with almost 75% of total stocks having fallen by more than 20% from 52-week high.
We believe Fed rate hike, rising crude oil prices and global geopolitical conditions (tensions between Russia and Ukraine) may result in short-term volatility and investors who can make use of such volatility and be patient over longer-term, should reap healthy rewards.
India Inc recorded healthy quarterly growth in Q3’22 with it being the 6th consecutive quarter of double-digit growth but it was the slowest growth in 6 quarters i.e. since Q2’21. Inspite of high base, revenues in Oct-Dec 2021 grew by 24% from a year ago (mainly on the back of higher price realisation due to rising input costs) whereas net profits increased by 27% y-o-y but were down marginally q-o-q inspite of festive season benefit in Q3’22.
Further, in the quarter gone by, there has been a wide divergence in earnings between sectors affected by rising RM prices (Consumer Staple, Consumer Durables, Cement, Auto, Pharma and Chemicals) and those not affected by rising input costs (BFSI, Metals and Oil & Gas).
Over the short-term i.e. next 1-2 quarters, we expect the earnings to be under pressure on the back of rising input costs and gradual pass through of the same without impacting demand/volume growth. However, we see lot of green shots across hosts of industries (like PLI scheme, China + 1 advantage, consolidation/market share gains from unorganised sector, import substitution etc.) which makes us confident of sustainability of current earnings momentum over longer-term.
We feel India is poised to outperform other global markets on earnings growth due to:-
- Historically low corporate leverage thereby supporting capex.
- Stable currency supported by record foreign currency reserves.
- Big and painful steps like GST implementation and banking system clean up have been done and we have already started to see benefits of those.
- Government finances are strong with tax collections expected to do well.
After a very tough decade, Indian entrepreneurs have become very frugal, efficient and intelligent (focus is on improving efficiency and processes, enhancing the share of value-added products, increasing utilisation before announcing new capex etc.). Hence, we feel India is at inflection point as for the 1st time we are presented with huge opportunity, low funding cost, supportive policies and strong balance sheet.
Inspite of the one-way rally of the last 18 months being halted by global headwinds as well as rural slowdown thereby resulting in the removal of some froth from the markets, we continue to believe that current uncertainty is only a passing phase and we remain structurally positive on India growth story.
We would like to end the update with the following quote:
“I’ve found that when the markets are going down and you buy funds wisely, at some point of time in future, you will be happy”
– Peter Lynch
