Market correction is no cause for needless panic as the macro-economic fundamentals are sound
A FTER SIX SESSIONS of losses, in which nearly 18 trillion of investor wealth was wiped out, India’s stock markets recovered on Friday. The crash was triggered by the sharp spike in US treasury yields to over 5%, an indication that interest rates will stay higher for longer. Indeed, the possible consequences of the escalation of hostilities in the Middle East have heightened the uncertainty and nervousness in the global economy. Crude oil prices may have come off their highs but they remain in the vicinity of $90 /barrel, adding to the concerns. With the US economy having grown at its fastest pace in nearly two years in the September quarter, fuelled by a surge in consumer spends, it’s now almost cer- tain the US Fed will continue to raise rates. This could result in an outflow of portfolio funds from India and consequently pressure the currency.Already, foreign portfolio investors (FPI) have pulled out close to $3.5 billion since September. To be sure, there’s no cause for alarm because India’s macro-economic fundamentals are sound. But inflation could remain elevated and money could stay costlier for longer, stymieing demand for loans. That could take some sheen off the economy.
The correction in the markets, which had run up very sharply, reflects the realisation that stocks are probably over-valued given that there are some pain points. For India, costlier oil imports will impact the trade deficit at a time when exports in the six months to September are down about 9% year- on-year. A weaker rupee might help IT companies but with limited visibility on revenues, software players are being compelled to cut back on costs and to hire less. Although other sectors will absorb the large number of engineers and IT professionals from the campuses, in aggregate this means fewer jobs and, therefore, less consumption.
Consumption is already somewhat weak across a range of products, especially in rural India where the growth in real wages has been stagnant. Moreover, the capex recovery has been driven essentially by the government which may need to conserve its resources for other purposes ahead of the general elections. The economy may therefore lose some momentum in the near term, on the back of elevated interest rates and inflation, impacting demand.
That said, the long-term story of an India that is poised to grow faster than any major economy, driven by favourable demographics, investments in infrastructure-both physical and digital-and traction in manufacturing via China+1, remains intact. India’s inclusion in the GBI-EM Global index, in June next year, will lower the risk premia, deepen the bond markets and give more borrowers access to funds. There are a large number of well-run and profitable companies with sound business models that make for a big universe of stocks that investors can choose from.
A relatively young population, more jobs, rising disposable incomes and an increasing share of savings being channelled into financial investments, all augurwell for the stock markets. Not surprisingly, brokerages are upgrading India to ‘Overweight” while downgrading peer markets. Corrections can be healthy for markets and some tempering of expectations is needed at times. At current levels of 19,047, the Nifty trades at a PE multiple of 20 times the FY24 estimated earnings but is valued at a more reasonable 17.5 times
FY25 estimated earnings. As the country moves to becoming the world’s third largest economy, there’s every chance of a re-rating.