Unique bids on interest rates and a strong dollar have triggered a simultaneous decline of more than 10% in global bonds and equities – for the first time in history. While bears suggest that this is an accident or a policy mistake made by the central banks. The bulls believe that a large part of it has been left out by the steep fall in risk-free and risky assets.
Risks are still abundant and some recent examples include the Bank of England’s action in UK gilts, bids on credit default swaps (CDS) of systemically important banks. Widening of 1-Month Forward Rate Agreement – Overnight Index Swap (FRA-OIS) spreads are indicative of dislocations. Hence, the debate on hard versus soft landing is hysterical and most are betting on the former, especially for major economies such as the UK and EU.
Indian markets continued to show resilience (down 12 per cent in dollar terms), even as the major emerging market index (MSCI-EM Index) declined 30% year-on-year. Whether the risk of imported inflation induced by rupee depreciation, coupled with a fall in the physical current account deficit or domestic food inflation (55% weighting of food in the Indian CPI), remains the same, most of these are already priced at rates and equities. marginally by the markets.
On a top-down assessment, among major economies, India is the only country that is expected to grow at 6% in CY23 and has the lowest negative real rate (policy rate – inflation rate) of minus 120 bps versus minus 500. Is. BPS in major developed markets This is coupled with mid-cycle robbing of rising tax collections, rising credit growth and improving capacity utilization.
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This is a promising scenario for mid-cycle plays such as banking, cyclicals and consumption. Banking, which accounts for a third of the stock market cap weight, is coming out cleanly. Asset quality issues have eased, and the sector is witnessing the best credit growth in the last five years due to retail and MSMEs. Price performance-wise, banking still hasn’t performed as well as key sectors such as IT and auto. With credit growth at 16% in FY 2013-24 and credit growth hovering around 13-14%, the banking universe is expected to deliver 41% year-on-year growth in net profit.
Autos and consumer discretionary which generally do well mid-cycle, especially with India’s per capita income rising above $2,000, are also in the reckoning. Both these sectors were under margin pressure. While the auto sector is likely to see a margin improvement of 300 bps, coupled with strong volume growth (aided by a lower base effect of Q2FY22), weak global macro prices may limit the magnitude of performance. On the consumer discretionary side, companies are expected to cut prices and this will lead to volume growth in 2H of FY13.
The most compelling story comes from flexible fund flows. on domestic money flows, while the role of SIP is well documented (average 12,000 crore per month in the last four months), the role of retirement fund allocation (average equity ETF inflow was 15,000 crore) is still not well understood, as these are stable pools of money that will keep coming. In addition, a tectonic shift has also been observed in FII money flows. In the last 20 months, India’s weighting in the MSCI EM Index has increased by 700 bps to 15%, while China’s weighting has declined by 1,200 bps. Over 90% of FII inflows to India come from EM dedicated funds, with interest rates surging and a strong dollar likely to drive strong inflows into India. Additionally, India boasts of a profitable and clean banking system in the EM space – the largest sector in the MSCI-EM Index.
In short, even if the stock indexes of the western world remain in disarray, India’s story will remain true and recover rapidly.
Azeem Ahmed is the head and key officer of LICMF PMS. The views expressed here are personal.
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