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Growth Outlook: What Lies Ahead? Securing and Sustaining Consistent Earnings Amid Election Period

Updated: Jun 2

Considering the market's anticipation of opportunities and risks tied to the upcoming government, as well as indications from US economic data suggesting that interest rates might remain high for a while, we've noticed some fluctuations in equity over the past month. 

Amidst all this, these are a few interim risks within the market, especially when considering the longer-term outlook However, the market is gearing up to support the momentum trajectory of the Indian economy, (given the stability in current policy). Here’s a concise overview from our research desk, highlighting the key metrics shaping this momentum outlook.

Indian Economy

The Indian economy has shown remarkable resilience in the face of global headwinds, despite elevated inflation and external sector pressures

Growth Trajectory

  1. India's Real GDP Growth and Future Projections: India achieved the highest real GDP growth among key global economies in CY23, and the IMF forecasts this growth momentum to continue in the coming years. As a result, India's contribution to world GDP growth is projected to rise from around 18% currently to 20% by the end of the decade. This increase will enable India to surpass the contributions of the US and the European Union, while matching China's share in the global economy.

  2. Supporting Structural Factors for Growth: India's favourable demographics, including a young and growing population, provide a robust foundation for economic expansion. The rise of a growing middle class fuels consumer demand and economic activity. Increasing urbanization contributes to economic development through improved productivity and infrastructure development.

  3. Challenges to Achieving Inclusive and Sustainable Growth: To ensure inclusive growth, India must address significant income inequality that affects a large portion of its population. The country faces infrastructure gaps that need to be bridged to support continuous economic development. Low female labour force participation remains a challenge, requiring policies and initiatives to enhance women's employment opportunities and economic contribution.

External Sector Resilience

  1. Improvement in Current Account Deficit: India's current account deficit narrowed to 0.9% of GDP in CY23, a significant improvement from 2.4% in the previous year. This reduction was supported by strong services exports and remittances.

  2. Forex Reserves and Economic Cushion: As of March 2024, India's forex reserves stand at $646 billion, making them the fourth largest globally These reserves provide an import cover of around 10 months, offering a substantial cushion against external economic shocks.

  3. Challenges and Currency Performance: Despite the improvement in the current account deficit, weak global demand and high commodity prices have led to widening trade deficits, which remain a concern. The Indian Rupee (INR) depreciated by about 1.3% against the US dollar in Q1 CY24. Nevertheless, the INR has outperformed many other emerging market currencies during this period.

Debt Levels and Financial Stability

  1. Government Debt Levels: India's govt debt-to-GDP ratio is around 85-90%, which is high compared to other emerging markets but lower than many advanced economies. The govt emphasizes the importance of balancing growth support with maintaining debt sustainability.

  2. Banking System Capitalization and Asset Quality: India's banking system remains well-capitalized, with a steady decline in the gross nonperforming asset ratio over the past few years. However, the COVID-19 pandemic has led to an increase in restructured loans.

  3. Potential Risks to Financial Stability: The true extent of asset quality deterioration in the banking sector may become evident once regulatory forbearance measures introduced during the pandemic are phased out.

Across the Equity Market

Both the S&P BSE Sensex and Nifty 50 indices have gained ~1.5% each in April 2024 compared to March 2024, against the backdrop of generally healthy corporate earnings, favourable macro data, and a rally in global indices.

Market Performance

  1. Strong Equity Market Performance: The equity market's robust performance is mainly due to strong buying in the banking and financial sectors, which reported upbeat quarterly results. Gains in domestic equity markets were driven by strong business updates from the banking sector, leading to investor optimism over Q4FY24 earnings.

  2. Challenges and Geopolitical Uncertainty: Despite the overall market growth, uncertainties surrounding geopolitical issues in the Middle East and weak global cues tempered some of the gains.

  3. Sector-Specific Growth: Domestic cyclicals such as the Banking, Financial Services, and Insurance (BFSI) and Auto sectors contributed significantly to the market growth. The BFSI sector achieved an impressive 22% year-on-year growth.  The Auto sector reported a substantial 38% year-on-year growth.

Sector performance

  1. Banking Sector: The earnings growth for private banks remained healthy, reporting better-than-expected earnings. However, the overall pace of NIM compression has moderated, even though funding costs continue to inch up. Advances growth has been healthy, at about 3-5% QoQ, for most banks, fuelled by growth across Retail and MSME segments. Asset quality has continued to improve, while SMA and restructured pool have been in control, leading to controlled provisioning expenses across banks. 

  2. Automobile Sector: The 4QFY24 results in the automobile sector have been in line with expectations, driven by several factors such as healthy volume growth across most segments (except CVs), better product mix, lower commodity costs, and operating leverage. However, it is important to note that margin pressures are expected to persist in the upcoming quarters due to the anticipated recurrence of certain costs.

  3. Consumer/Consumer Discretionary Sector: The 4QFY24 results in the consumer and consumer discretionary sector have been in line, with an improving consumption trend. While there has been a marginal improvement in volumes on a YoY basis, it is expected that volume recovery will be more noticeable in FY25. The impact of price cuts will likely settle down in 1HFY25 for most commodity-sensitive categories, and 2HFY25 may see price hikes.

Equity Portfolio Investment Strategy

  1. Resilience and Growth of the Indian Equity Market: Despite the challenges posed by the ongoing general elections and global central bank actions, the Indian equity market has shown remarkable resilience and growth potential. The strong performance of domestic cyclicals, particularly in the BFSI and Auto sectors, has been a key driver of this growth.

  2. Positive Market Outlook: The equity market outlook remains positive due to factors such as corporate deleveraging, an uptick in capital expenditure (capex), and steady profit growth expectations.

  3. Investment Strategy: Given the current uncertainties, a balanced and resilient investment strategy is advisable. Investors with appropriate equity allocation should remain invested. Those with lower than desired equity allocation should increase it using a staggered approach over 3-6 months for large and multi-cap strategies, and 6-12 months for select mid and small-cap strategies. Accelerate deployment during sharp market corrections.

Across the Debt Market

1. Inflation: Inflation is at 5.1%, down from last year but still above the RBI's target due to high vegetable prices affected by weather and supply issues.

2. Bond Yields: Domestic bond yields in India are stable, with the RBI likely to hold rates longer before lowering. Positive factors include domestic macroeconomics and inclusion in global indices.

3. Opportunity: Downside risks include US Treasury yield stability, the Fed maintaining higher rates, crude oil prices, and geopolitical tensions. Consider shifting towards longer-duration strategies to benefit from current higher rates.

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