Although my objective is to provide views and recommendations on the Indian market, I am also writing about USA economic numbers and policy, since USA markets influence greatly the other markets, including the Indian market. The correlation is high, but as I have been writing in my previous articles that we might have a period of dissociation favoring Indian markets and August 2022 statistics perhaps show that it is being initiated.
In August 2022, Nifty 50 generated a return of almost 4% while S & P 500 of the USA fell by 4%. USA 10-year bond yields moved up from 2.6 to 3.2, while Indian bonds stayed static at around 7.25%. USA 2 year moved up to 3.4 from 2.9 while Indian was again static around 6.6 %. USD index moved up from 105.4 to 109.6 while INR fell much less from 78.96 to 79.7. Moreover, the rise in interest rates globally is reducing the commodity prices which favours India since it is a net importer, for example, Brent Oil prices fell to 95 USD per barrel from 100 while Copper fell from 355 to 340.
Federal Reserve Chairman Jerome Powell utilized the Jackson Hole symposium on August 26 to state that his overarching focus is to bring inflation down to the Fed’s goal of 2%. He emphasized that reducing inflation will require a sustained period of below-trend growth, softening of labour market conditions, and pain to households and businesses. He rationalized that the failure to restore price stability would mean far greater pain. He concluded that restoring price stability will require maintaining a restrictive policy stance for some time.
The market reacted predictably with stocks moving down, both 2-year and 10-year yields moving up and the USD index rising. This time the difference seems to be that the market is looking at ‘sustained’ restrictive policy more seriously. Previously, a slightly better inflation number had led to a good stock market rally and buying of bonds.
A case in point is the Sep 2 report showing that Nonfarm payrolls rose by 315,000 jobs in August, below the Dow Jones estimate for 318,000 and also much lower than the previous month’s number of 526,000. The unemployment rate climbed to 3.7%, two-tenths of a percentage point higher than expectations. However, this time there was no bond market rally and stocks actually fell slightly.
The debate though continues – Professor Jeremy Siegel of the Wharton School, feels that Fed should slow down its rate hikes as there is a risk of overtightening the economy. He says that 26 of 27 inflation indicators in August 2022 have reported below-expected figures.
He added that CPI typically lags behind a real drop in prices and that real estate prices might also be coming down. He feels that Fed only needs to hike another 100 basis points this year before pivoting. The current policy rate is 2.25-2.5%. But that debate also should not bother us since a positive surprise from the USA markets will also be good for the Indian markets.
Contrastingly, Indian GDP showed a 13.5 % growth in Q1 FY 2023 though it was less than expected, and also the base effect has contributed to the high number. High-frequency indicators are faring well, for example, GST collection in July 2022 was Rs 1.43 lakh crores. Automakers are also reporting robust numbers. Some of the other indicators including purchasing managers index are mixed though likely to improve if oil prices decline or remain stable close to the present level.
RBI expects India’s GDP growth in 2022-23 to be 7.1% and in 2023-24 to be 6.7 %, thus keeping India as the fastest growing large economy in the world. Inflation might fall below 6% in Q4 of FY 23. RBI has an inflation target of 4 percent within a band of +/- 2 percent while supporting growth. Therefore, though further interest rate hikes are expected, those might not be so sharp as to constrain economic growth. Also with GST collections expected to remain buoyant, the government can continue to spend on infrastructure.
Consequently, our medium-term view of Indian equities remains bullish and we continue to recommend equity positions for goals with a time horizon of more than 3 years. Risks are always there, presently volatility of Foreign Portfolio Inflows and therefore emphasis is on the medium term. Money should mainly be invested in well-chosen high-quality diversified equity schemes. Additionally, the banking sector, given its valuations and the current economic cycle stage, is attractive.
The infrastructure and defense sectors are also likely to perform well because of the government’s sustained push and spending. A new CAPEX cycle might be emerging and will be good for industrial, engineering, industrial automation, and logistics companies. Domestic consumption is a good story and will favour autos, hotels, and discretionary consumer spending stocks. It is always important to maintain good amounts in your liquidity and contingency fund. Those should be in ultrashort-term debt funds in the current scenario of rising and volatile interest rates.
