“feel what?” and “What to do?” These two questions are being asked the most by most of the financial market participants for the past two weeks. All the participants are trying to answer them on the basis of their ability and assessment. However, as the situation is changing every day and sometimes within a day and new complications are emerging, it is obvious that the answers to these questions will also change every day based on that.
If I were to answer these questions as someone who is an independent observer of the market, I would prefer to look at things through a shorter-range lens rather than being swayed by hourly news.
I will focus on the Indian markets, as my lenses do not allow me to see long distance scenes. For example, I am unable to comment on the economies of the US and European countries and the potential impact of the Russo-Ukraine war on them.
In my view, the stars are against the Indian economy and the market. We will need a very strong political will, economic acumen and divine help to get out of this situation.
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it doesn’t look good
I do not attach much importance to the Russia-Ukraine conflict. My understanding is that this struggle has been going on since at least the breakup of the Soviet Union. When Russia annexed Crimea, one of Ukraine’s major provinces, in 2014, hostilities between the two countries deepened.
I believe this local conflict will continue for years if Russia does not back down. Russia and NATO will continue to help rival groups through money and weapons during this period, as was the case with Afghanistan.
I believe the state of the Indian economy was worrisome even before this geopolitical issue escalated. This conflict has only added some new dimensions to the problem.
The GDP figures for the third quarter of the current financial year are no exception. This structurally suggests a trend of slow growth that may continue into FY2023 and even into FY2024. The Reserve Bank of India has also projected the GDP growth rate to be less than 5 percent in the second half of the financial year 2023.
India’s tax to GDP ratio is equal to 2007. That means there has been no improvement in 15 years. At the same time, interest payments have increased by one-third from 5 percent of GDP to 6.5 percent of GDP.
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According to the budget estimates for the financial year 2023, the central government will spend more than 20 per cent of the budget only on interest payments. This means that the budget for development, social sector spending and subsidies is coming down.
Consumption has been affected due to high rate of inflation, negative return on savings, increased indirect tax burden on middle class and lower middle class, reduction in social sector spending/cash payment etc. At the same time, it can also be said that there is not going to be any change in them anytime soon.
Crude oil prices on fire
A global geopolitical crisis has made the situation worse for the government. Russia and Ukraine are major suppliers of crude oil and gas as well as edible oil.
A large part of India’s edible oil also comes from these two countries. Supply chain disruptions due to war or sanctions could push up edible oil prices, with families paying the brunt.
Petrol-diesel and LPG prices have not changed for a long time, apparently in view of political convenience. However, since then the prices of natural gas and crude oil have increased significantly. The sanctions on Russia could push its prices further, which would be a delicate situation for India.
If the government decides to pass on crude oil prices entirely to consumers, inflation could rise and consumption demand could further drop. On the other hand, if the government decides to bear this burden on its own, the fiscal deficit, borrowing and interest burden will go up substantially beyond the budget estimates.
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Obviously, this will defeat the main objective of the budget, to increase the capital expenditure. Global agencies will keep sovereign ratings under review, which will make borrowing costs even higher. Financial stress may increase, the phase of improvement in asset quality may come to an abrupt end for banks.
All this is prompting foreign investors (FPIs) to sell Indian stocks, which will put pressure on the current account and rupee.
High rate of inflation, low income, weak rupee and high cost of capital – all these are likely to appear together for some time.
In the words of Mirza Ghalib: “Tha zindagi mein marg ka khatka hua, flying se pesh-tar bhi mira rang zard tha (My life was always in danger; I was in a similar crisis before this crisis)”
So here the only answer to the first question that can be answered is “I don’t feel good right now.”
So what to do?
It is important to note that the country is currently in a state of stagflation. That is, the rate of economic growth is low and the rate of inflation and unemployment is high. In this situation, private consumption decreases. Exports have helped to some extent in the last few years. However, due to slowing of growth rate due to strict monetary policy in Western countries, prolonged geopolitical conflict in Europe and possible restructuring of the global system (political restructuring, new trade blocs, currency preferences and energy mix etc.) In the financial year 2023, there will be a dark cloud over exports.
Public expenditure is a major engine of growth. The government made good cash payments to the poor and farmers to increase private consumption. It also ramped up spending on capacity building to compensate for slow private investment.
It is clear from the Budget Estimates for FY 2023 that the government’s ability to support growth is now limited due to fiscal constraints.
What does this mean for equity markets?
In my view, the Indian stock markets have seen a boom in the last five years because of these 10 reasons:
1. The market share of large and well-organized companies has been increasing at the expense of smaller and poorly run businesses. Demonetisation, GST and the corona pandemic helped propel this trend, the impact of which was seen in all parts of the country.
2. Making a substitute for imported goods and emphasis on export. Several sectors like chemicals, pharmaceuticals (APIs), electronics, food processing have created good capacity to produce locally. Whereas earlier goods were imported in these sectors. Some global companies have also increased their domestic capacity to tap the export market from India. Many Indian companies have built their capacity keeping in mind the export market. The government has helped increase this by providing financial and economic incentives.
3. The introduction of the Insolvency and Bankruptcy Code and some incentive schemes has accelerated the resolution of bad assets and improved the asset quality of banks.
4. Low interest rates on savings by banks, inflation, business stress for small businesses and losses in some loan portfolios have prompted a large section of domestic investors to increase their income and even protect their savings. Motivated to invest in equities.
5. Increase in income of rural population due to cash payment from government, higher MSP for crops, better access to markets etc.
6. The growing popularity of digital technology has not only increased efficiencies for traditional businesses, but has also led to a number of new businesses (etailers, fintech, B2B and B2C platforms, incubators, etc.), which are garnering higher valuations than traditional companies. Huh.
7. Improvements in infrastructure such as roads and electricity have increased the productivity of companies and reduced their costs.
8. The trend of taking expensive and amateur things in the Indian middle class category has increased, due to which they are now spending more than before.
9. Climate change efforts are fueling public interest in clean energy and electric vehicles.
10. Due to cut in corporate tax rates, profits of many companies have increased.
To decide what to do next, an investor needs to assess how the economic, financial and geopolitical situation will be:
>> What will be its impact on these reasons for the boom in Indian equity markets?
>> How will this impact the earnings of the companies in FY23 and FY24, basically depending on the reasons for the jump?
While assessing, it will also have to be taken into account whether their effect will be for a long time or it is just a few days of earthquake.
In my view, these will have an impact only for a few days and the reasons mentioned above for the rally in Indian equity market will continue for the medium term i.e. next three to four years.
So, I will ignore these short-term earthquakes and stay in the market. I will follow these things-
>> Avoid taking conflicting views.
>> Follow a simple investing style to achieve your investment goals. It is more likely that this route is boring, lengthy and clearly less rewarding. But in my view, this is the only way to get sustainable returns in the long run.
Take a straight path. Invest in companies that have the potential to perform well (sustainable revenue growth and profits), generate strong cash flows; have sustainable earnings; Make changes from time to time according to the emerging technology and market needs and its share price is increasing continuously. It is possible that such companies may not belong to the ‘hot sector’ or they may not be big enough to find a place in the benchmark index.
Obviously there is nothing new in these ideas. Many people have repeated this over and over again. Still, I feel that like religious rituals and mantras these also need to be practiced and chanted regularly.
And if you find a contradiction in my views on the economy and markets, I politely disagree with you.
– This article is written by Vijay Kumar Gaba for Moneycontrol. The author is the director of Equal India Foundation.
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