We will focus on the following things in this post: the previous month in equities, the Q2 GDP results summary and an overall outlook on the markets.
Indian Equity Markets:
Indian equity markets performed robustly from May 2021 to Oct 2021 with the Nifty growing 27% to top off at 18604. The markets in the short term were overheated and a cool off was highly anticipated. A combination of the US FED taper announcements, inflation woes and the Omicron variant of the Covid-19 virus was the reason the market attributed to the fall in November 2021. The markets corrected almost 10% from their October all time highs. While we remain cautious to developments, this is not yet a bear market. The weekly and monthly charts of the NSE benchmark index still look strong. It is not uncommon for markets to correct in this magnitude especially after such a hot bull run.
This could be a time to start accumulating some fundamentally strong stocks where valuations have eased. On technical fronts, there could be further short term pain if weak global cues persist and 16100 Nifty could be an important support level. On the upside, we see 17900 as resistance levels. We remain cautiously optimistic.
However, there is no doubting uncertainty in the markets especially with respect to fundamental shifts caused by inflation and tightening of monetary policy, not to mention the new coronavirus variant.
How individual sectoral indices performed:
The table above gives a good representation of how the markets respond to such events. The sell-off is not sector agnostic, and it is typical for Pharma, IT and FMCG stocks to be safer short term investments during these type of markets.
What we understand from the Q2 GDP numbers
GDP grew by 8.4% surpassing most estimates, and closed above the pre pandemic levels in 2019-20. The Indian economy has staged a robust recovery, although it is not broad based. Some key points:
- Corporate sector has outperformed as can be witnessed in their filings with many companies improving operational metrics and deleveraging.
- Agriculture sector continued to grow for 2 successive years cumulatively by almost 8%. The agriculture output growth is being attributed to bountiful monsoon and increased workforce participation owing to the pandemic.
- Strong recovery owing to pent up demand in private spending for consumer services. However consumer goods spending weak, especially in rural India. Shows stress in rural India despite decent agri growth. Elevated NREGA expenditure also supports this argument. Overall, private consumption which is ~55% of the GDP is still 3.5% below pre pandemic levels.
- MSME sector which employs over 80% of the formal workforce and contributing to 30% of overall GDP is still stressed and starved for capital as opposed to the corporate sector. While access to capital has been made available, there is reluctance from banks to lend. Further headwinds for the capital starved sector is the high WPI inflation of 12% previous month.
- Significant employment growth seen in the construction and trade tourism industry, but numbers still below pre pandemic levels.
- Trend of increased imports is being seen especially for private consumption of consumer goods. Imports in the increased 32% while domestic consumer goods manufacturing is 6% below pre pandemic levels. Private consumption in services is much more stronger and robust.
- -Public Capex (25% of total Capex) sequentially grew impressively as the government loosened its purse to invest in infrastructure. Private capex though, which has a three fold GDP multiplier(as compared to public) and constitutes 75% of total Capex contribution, remains muted.
For more on this, do watch this video: State Of The Economy With HSBC’s Pranjul Bhandari – YouTube
The GDP news is as usual a mixed bag. But the bottom-line is that corporates are better off, MSME’s are worse off and the bottom of the pyramid economy struggling quite a lot. While this is good news for the stock markets, the long term impacts of this trend for India overall can be worrying. The only way out is government reform. The government on its part has taken reformative action, most notable of which is their asset monetisation scheme, PLI scheme and the IBC and bad bank reforms. No, we are by no means macro economy experts, and don’t claim to be able to recommend solutions or forecast outcomes.
But we know this. For the Indian growth story to play out long term, wealth has to trickle down to the bottom of the pyramid, and we need to have a burgeoning healthy MSME sector that supports the large corporates and keep the markets competitive.
We believe strongly in the India growth story overall, and are on the constant lookout for the best opportunities to invest in. We firmly believe that Indian equities as an asset class are a solid investment, if you know where to invest.
Thank you for reading…