Recent developments, such as the rate hike by the Bank of Japan and fluctuating U.S. economic data, have led to increased volatility in risk assets. During these uncertain times, it’s crucial for investors to stay disciplined by adhering to their Investment Charter, maintaining a well-thought-out Asset Allocation, and following a strategic deployment plan. These measures are essential for long-term wealth creation, even in turbulent markets.
Indian Macroeconomic Outlook
Growth Overview: The first quarter of the current financial year showed a growth rate of 6.7%, slightly below the Reserve Bank of India’s (RBI) earlier projection of 7.1%, due to a dip in government expenditure and agricultural growth.
Sectoral Performance: Manufacturing was driven by robust domestic demand, the manufacturing sector is witnessing strong growth. The Index of Industrial Production (IIP) saw a notable uptick in May 2024, while the Purchasing Managers' Index (PMI) for manufacturing remained resilient at 58.1 in July, indicating continued expansion. While the services sector continues to perform exceptionally well, with the PMI for services maintaining a reading above 60 for seven consecutive months, reaching 60.3 in July. This consistent performance underscores the sector’s pivotal role in the economy.
Demand Dynamics: Household consumption is being fueled by a combination of improved rural demand and steady discretionary spending in urban areas. This dual support from both rural and urban markets bodes well for sustained economic momentum. Fixed investment activity remains robust, driven by the government’s focus on capital expenditure (capex) and supportive policy measures. Private corporate investment is also on the rise, with increased bank credit facilitating this growth. In the case of External Trade, merchandise exports experienced growth in June, the pace of this growth has slowed. However, the increase in non-oil, non-gold imports reflects resilient domestic demand, and services exports, despite moderating in June, still posted double-digit growth in May.
Growth Projections: The real GDP growth for the current fiscal year is projected at 7.2%, with quarterly growth rates anticipated to be 7.1% in Q1, 7.2% in Q2, 7.3% in Q3, and 7.2% in Q4. Looking ahead to Q1 of FY 2025-26, the growth rate is also projected to be 7.2%.
Risks to Growth: Despite these positive projections, several risks remain. Geopolitical tensions, volatility in international financial markets, and geo-economic fragmentation could pose challenges to the growth outlook.
Indian Equity Market Outlook
Market Valuations: Large-Cap Stocks following a recent market correction, large-cap stocks are now fairly valued when assessed based on Price to Earnings (PE) ratios. This presents a relatively stable opportunity for investors looking to allocate capital in this segment. In contrast, mid and small-cap stocks appear relatively expensive, reflecting higher valuations post-correction. This suggests a need for caution and a more strategic approach when investing in these segments.
Focus on Cash Flows: A key metric for evaluating the quality of businesses is their cash flow generation. For companies within the Nifty500 index (excluding banks and financials), the Enterprise Value to Cash Flow from Operations (EV/CFO) ratio has declined from its peak in 2021. This indicates that these companies have been able to generate cash flows at a faster rate compared to the growth in their market capitalisation over the past two years, highlighting strong underlying business fundamentals.
Investment Strategy: For Large-Cap and Multi-Cap Strategies, given the current market conditions, a staggered investment approach over the next six months is suggested for large-cap and multi-cap strategies. This approach allows investors to mitigate risk while capitalising on market opportunities. For mid and small-cap strategies, it is to be spread investments over 6 to 12 months. This longer investment horizon can help mitigate the risks associated with the higher valuations in these segments.
Sectoral Earnings Growth: Domestic Sectors:
Automobiles: +34% YoY growth, reflecting strong consumer demand and robust performance in the sector.
BFSI (Banking, Financial Services, and Insurance): +19% YoY growth, driven by solid fundamentals and continued expansion in financial services.
Healthcare: +19% YoY growth, indicating steady demand and resilience in the sector.
Real Estate: +80% YoY growth, showcasing a significant rebound and strong momentum in the property market.
Capital Goods: +14% YoY growth, supported by ongoing infrastructure projects and industrial demand.
Global Cyclicals:
Oil & Gas: -49% YoY decline, with Oil Marketing Companies (OMCs) experiencing an 80% YoY drop in profits, reflecting challenges in the global energy market.
Metals: -5% YoY decline, indicating softness in global demand and pricing pressures.
Cement: -2% YoY decline, affected by cost pressures and subdued demand.
Specialty Chemicals: -16% YoY decline, reflecting challenges in the global chemicals market.
Banking Sector Performance: The banking sector saw mixed results, with some private banks reporting a moderation in business growth. However, overall performance remained stable, with margins either holding steady or slightly weakening. The quarter also revealed weaker asset quality and subdued demand in new personal vehicles and mortgages. Despite these challenges, select lenders in the affordable housing and vehicle finance segments showed strong disbursement momentum, indicating resilience in specific areas of the market.
Technology Sector Performance:The technology sector demonstrated healthy performance during the quarter: Tier-1 Players: Achieved a median revenue growth of 1.2% QoQ in constant currency (CC), reflecting steady demand and continued expansion in their services. Tier-2 Companies: Posted a median revenue growth of 1.6% QoQ CC, outperforming Tier-1 players, driven by niche offerings and focused business strategies.
Valuation Considerations: Nifty-50 Stocks Valuations are now near their long-term average, trading at 21x one-year forward earnings, suggesting a balanced outlook for large-cap equities. For Mid and Small-Caps, Stocks are considered expensive relative to historical averages, indicating a need for cautious investment strategies.
Indian Debt Market Outlook
Fiscal Management: The fiscal deficit for FY25BE is projected at 4.9% of GDP, slightly better than the interim budget estimates of 5.1%. There is an expectation of a progressive reduction in the fiscal deficit to below 4.5% by FY26E. From FY 2026-27 onward, the Central Government aims to maintain a declining debt trajectory as a percentage of GDP.
The govt estimates gross borrowings through dated securities (G-Sec) at INR 14.01 lakh crore and net borrowings at INR 11.63 lakh crore for FY25BE. These figures represent a 9.2% decrease in gross borrowings and a 1.5% decrease in net borrowings compared to FY2023-24, reflecting prudent fiscal management.
Bond Market Volatility: Despite stable long-term domestic macro fundamentals, the Indian bond market has witnessed heightened volatility, largely driven by global factors. Mixed global macroeconomic signals, uncertain central bank policies across developed markets, and rising geopolitical tensions have contributed to this volatility. The 10-year Government Security (G-Sec) yield eased from 7.35% in October 2023 to 7.00% in March 2024. However, the bond market has since experienced increased volatility, with the yield trading in a broad range of 6.92% to 7.20%.
Positive Factors: Several factors continue to support the Indian bond market, including stable domestic macros, the inclusion of Indian bonds in global indices, lower gross borrowings, and improvements in India's Sovereign outlook. Additionally, the government’s commitment to fiscal consolidation provides a strong foundation for bond market stability.
Volatility Risks: Despite these positive factors, short-term volatility may persist due to global influences, such as U.S. Treasury yields, mixed global macro signals, divergent central bank stances, and fluctuations in crude oil prices.
Intelligent Investor Notes
Adhere to Your Investment Charter: Despite potential market corrections, maintaining discipline through your Investment Charter and a well-thought-out Asset Allocation is crucial for growing your wealth while navigating volatility.
Phased Investments in Large-Cap and Multi-Cap Stocks: Consider phased investments in large-cap and multi-cap stocks for stability and growth. Additionally, explore niche strategies, such as long-short strategies, to balance growth with downturn risks.
Opt for High-Yield Debt: For a more conservative approach, consider including high-yield debt in your portfolio to capitalise on the current interest rate cycle while maintaining balance and stability.
Focus on Selective Niche Opportunities: Take advantage of current market opportunities with intrinsic value in sectors benefiting from the improved capex cycle, such as manufacturing, infrastructure, and real estate.
Comments