"You get recessions, you have stock market declines, if you don't understand that's going to happen, then you're not ready, you won't do well in the markets” - Peter Lynch
Looking back, over the past month, there has been a notable decline in the market, and witnessing your investment portfolio drop can be quite panic-inducing. However, the market has shown signs of recovery with an uptrend observed from the last week of March, thus making it crucial to recognize these as short-term market corrections, which are part of any market cycle.
One should only be concerned about these downtrends if one lacks a long-term outlook on their investment and a clear investment plan outlining how their investment will generate returns over the long term. Thus, by providing a long-term perspective on current market trends, here is a detailed report on what can be anticipated regarding the current equity and debt markets and the Indian economy going forward.
Indian Economy
The global economy is losing steam, with growth slowing in some of the most resilient economies, and high-frequency indicators pointing to further leveling in the period ahead. For instance, in the US, the production index weakened to 48.4 from 50.4. It was the lowest level since July 2023 and below the recent high of 51.9 this past September.
While in India, real GDP growth hit a six-quarter high in Q3: 2023-24, reaching an impressive 8.4%. The Q4 quarter-on-quarter growth is estimated to be 5.9% by the RBI. This surge was powered by strong momentum, robust indirect taxes, and reduced subsidies. Looking ahead, there's a positive outlook driven by structural demand and healthier corporate and bank balance sheets.
Private consumption growth inched up to 3.5%, especially driven by a revival in rural consumption.
Gross Fixed Capital Formation (GFCF) continued its strong growth trend, with a double-digit increase of 10.6%, as seen in steel consumption and capital goods production.
However, export growth remained subdued due to weak global demand, causing imports to outpace exports and dragging down the external sector by 1.2% points in Q3:2023-24.
Despite this, high-frequency indicators suggest ongoing strength in domestic demand conditions. For instance, e-way bills increased by 14.8% and toll collections by 15.1% (year-on-year) in February 2024, indicating sustained vigor in the economy.
India's Global Impact: Significant Increase in MSCI EM Index Weight
India's weight in the MSCI Emerging Markets (EM) Index has significantly increased, marking a pivotal shift in its global investment stature.
MSCI, the index provider, raised India's weight in its Global Standard (EM) index from 15.9% to 16.3%. This move is expected to improve the flow of foreign funds into the country after a two-year stagnation.
Over the past three years, India's weight has nearly doubled, reflecting its growing influence and attractiveness to foreign portfolio investors (FPIs).
With India's weight in the MSCI EM Index reaching new heights, the country is positioned to attract a greater share of international capital flows.
Private Investments Driving Industrial Capital Expenditure
In recent years, capital expenditure (capex) in India has been mainly driven by household sectors and government-funded infrastructure projects. Looking ahead, its exptected that the industrial sectors will pick up steam, attracting investments in both traditional and emerging areas.
Industrial Capex Growth: Industrial capex has grown at an average of around 9% annually between fiscal years 2019 and 2023, reaching approximately Rs 3.9 lakh crore per annum. This trend is expected to continue with an average rise to about Rs 6.5 lakh crore annually between fiscal years 2024 and 2028.
Private Sector Driving Capex: Private sector investment is expected to play a crucial role in driving capital expenditure, especially in both conventional and emerging sectors.
Factors Driving Industrial Capex Growth: Higher capacity utilization, strong investment interest in emerging sectors, and the implementation of schemes like Production-Linked Incentive (PLI) are anticipated to boost industrial capex in the coming years.
Infrastructure Capex Fueled by Power Sector: Infrastructure capex, particularly in the power sector, is expected to rise significantly, with power contributing a substantial portion to total infrastructure capex.
PLI Scheme and Emerging Sectors: The PLI scheme and emerging sectors are set to drive a considerable portion of incremental capex in India, indicating a shift towards these sectors in terms of investment.
Value Addition in Electronics and Battery Ecosystem: Investments in sectors like electronics and battery production are expected to enhance India's value addition potential, with significant opportunities for growth and self-sufficiency in these areas.
Solar Sector Expansion: The solar sector is poised for rapid expansion, driven by government initiatives and interventions like the PLI scheme, leading to increased capacity additions and reduced import dependency.
In conclusion, India's industrial landscape is undergoing a transformation with significant potential for growth, driven by a combination of government policies and private investments, particularly in emerging sectors. Addressing ongoing challenges is crucial for India to realize its industrial growth potential and integrate into the global economy effectively.
Indian Equity Market
In February, the Indian equity market saw significant ups and downs but ended the month positively overall. Major indices like the Nifty 50 and the S&P BSE Sensex reached new highs, while mid-cap and small-cap indices didn't perform as strongly, finishing slightly lower than the leading indices. Despite this, market volatility was less intense compared to the previous month.
Foreign and Domestic Institutional Investments: In February, Foreign Institutional Investors (FIIs) remained cautious, with inflows totaling only USD 0.5 billion, which somewhat impacted market performance. In contrast, Domestic Institutional Investors (DIIs) showed stronger engagement, purchasing USD 3.1 billion worth of assets during the month, thus contributing to stabilizing market volatility.
Sector Performance: Various sectors in the equity market showed different performances. Banking, Financial Services, and Insurance (BFSI) along with the Auto sector led with strong earnings growth. BFSI reported a 22% year-on-year (YoY) earnings increase, while Auto saw a substantial 59% YoY surge. The Oil and Gas (O&G) sector also performed well, experiencing a healthy 40% YoY earnings growth, driven by Oil Marketing Companies (OMCs) benefiting from strong marketing margins. Other sectors like Consumer, Technology, and Metals also contributed positively to overall market performance with healthy earnings growth.
Equity Market Outlook: Looking ahead, market dynamics are expected to be influenced by favorable cyclical factors. Infrastructure, domestic manufacturing, and utilities sectors are anticipated to benefit. Additionally, growth opportunities in sectors such as power, defense, and transportation, supported by government policies, are expected to contribute to market performance.
Indian Debt Market
Rising demand in Indian Debt Market: Foreign investors are increasingly investing in Indian G-secs through the Fully Accessible Route. This surge follows the inclusion of Indian G-secs in major global indices like JP Morgan's GBI-EM Global index since 2024, and it is set to rise with the upcoming inclusion in the Bloomberg Emerging Market Index from January 2025
RBI's Stance: The RBI has opted to maintain the status quo on monetary policy, keeping rates and stance unchanged. The Central Bank has adopted a cautious approach, closely monitoring inflation trends while also supporting growth and ensuring the full transmission of previous rate adjustments. In February, consumer price inflation, remained nearly stable at 5.09%, compared to 5.1% in January. The recent uptick in inflation can be attributed to a rise in food prices, which increased to 8.66% in February from 8.3% in January.
Looking ahead:
RBI is expected to maintain its current stance for most of 2024, possibly initiating a shallow rate easing cycle by the end of the year.
Even before actual rate cuts, RBI might shift its stance from "Withdrawal of Accommodation" to "Neutral" by 1QFY25, potentially reversing the 25 bps rate hike enacted through liquidity tightening.
Market dynamics and factors such as global index inclusion, fiscal consolidation, and lower borrowing in FY25E are likely to soften longer maturity yields:
The yield curve may flatten and shift downwards due to active liquidity management, a shallow rate cut cycle by the end of CY24, and favorable demand-supply dynamics.
Short-term strategies can focus on tax-efficient fixed-income options, while longer-term investments may benefit from a combination of long maturity G-secs, AAA Mutual Funds & Bonds to minimize reinvestment risk and lock in potential gains.
Outlook: To capitalize on the recent uptrend in the market and to make the most of the current interest rates, we suggest investing in debt-oriented hybrid funds. This approach allows you to benefit from the uptrend in debt markets while maintaining a reasonable level of stability, especially if you're aiming for a more risk-adjusted portfolio.