For the next four quarters, the Indian economy is likely to grow at less than 5%. This will be a time when the global stage may witness a high-decibel drama.
Furthermore, the forecast for FY24 is 6.2 percent (ranging from 6 percent to 6.4 percent), reflecting the rising global slowdown, which is weighing on exports; the lag effect of monetary tightening, which is expected to hit in 1HFY24; investments slowing due to poor demand growth visibility; and persistently high inflation, which is weighing on domestic savings.
As a result, the Indian economy is likely to grow at less than 5% over the next four quarters. This will be a time when the global stage may witness a high-decibel drama. Current trends indicate that monetary tightening by the US Federal Reserve and other global central bankers has already begun to affect demand and employment. Consumer demand, housing starts, and high-paying jobs are all on the decline. Similar trends can be seen throughout Europe. Bond yields are falling, despite the possibility of further hikes and tightening by central bankers, at least until 1Q2023, indicating a significant slowdown in the global economy in 2023.
The long term growth trend (5yr CAGR) continues to remain below par.
Markets should be concerned about some trends in 2QFY23 GDP data. For example, industry sector growth fell by 0.8 percent, owing primarily to a drop in manufacturing activity (-4.3 percent).
- Government consumption fell by 4.4 percent, while private consumption fell both year on year and sequentially.
- Exports slowed for the seventh consecutive quarter. Export growth of 11.5% in 2QFY23 was the lowest since the pandemic. Given the looming global slowdown, net export is likely to be further strained, further denting global demand.
- Growth in services (9.3 percent) was also lower year on year (Q2FY22-10.2 percent) and sequentially (1QFY23-17.6 percent), primarily due to community and defence services.
- Subsidy disbursement was poor, while tax collections were strong, resulting in 5.6 percent lower GVA growth.
- The Gross Domestic Savings (GDS) rate in 1HFY23 was 26.2 percent of GDP, the lowest in two decades.
- The fiscal deficit from April to October 2022 is reported to be 45.6 percent of FY23BE. This is significantly higher than the 36.3 percent recorded during the same period in FY22. This number, when combined with higher tax collection, lower government consumption, lower subsidy distribution, and a sharp increase in government investment, suggests that government capex may be slower in 2HFY23.
Aside from economic data, market fundamentals point to market headwinds in the coming months. For example, the current spread between 10-year US Treasury yields and 10-year GOI Treasury yields is 3.4 percent, the smallest since the global financial crisis. Given the negative BoP forecast for FY23, the USDINR may remain under pressure, narrowing theoretical arbitrage for foreign USD investors even further. If this spread holds or narrows further, foreign portfolio flows may be impacted.
- NSE500 EBITDA margins were 15.7 percent in the second quarter of FY23, the lowest in ten quarters. Thus, despite a 29 percent YoY increase in sales, NSE500 PAT fell 3 percent.
- Net FPI selling has decreased to $3 billion in YTDFY23, but domestic flows are showing signs of fatigue. Domestic flows are likely to be moderate in the coming months, given the decline in domestic savings and the strain on household finances.
- The Nifty is currently trading at a 10% premium to its long-term average one-year forward PE multiple. Because current EPS estimates are elevated and likely to be reduced further, this premium could be higher.
I will remain cautious and will not be swayed by the recent market uptick. I believe that the market will provide significantly better entry points in the coming months. For the time being, I am sticking with my standard asset allocation in my current portfolio (see here). However, if the markets continue to rise from their current levels, I would like to raise some tactical cash.
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