Indian Market Outlook 2022: Top-Down Analysis
Alarming global inflation, Tension between countries, New covid variants, &, etc. Let's make sense of all these in the following article.
We are hooked to multiple devices, & each time we check these devices we are bombarded with multiple news. There is a consistent swing in the viewpoints from good to gruesome, with each of these news we go through. Hence to make a proper viewpoint for the equity market, we need a structured framework for processing the data.
One such framework, that I frequently use to prepare my viewpoint on market outlook is ‘Top-Down Analysis’ — it covers Global Macro-Economic Sentiments, Indian Economy, Sectoral Insights, & Specific Business.
For the scope of this article, we will be dwelling deep into the first three segments. And try to put all the major happenings/news in this framework. So, let’s get started.
Global Macro Sentiments
To understand these sentiments we have to look at the events based on the large-scale events related to national economies, history, and international relations. Based on the recent news, we can interpret the following –
- Red flags of Inflation: The US in December 2021, reported its historically high inflation rate at 7.5% (highest since 1982) against the present average global inflation of 3%. Even in countries like Turkey, inflation has skyrocketed to 36.1% in December 2021 (Due to questionable local central bank policies). Hence, broadly we can expect that central banks across the globe will be watching the inflation very closely as high inflation rates sustaining over longer periods will hurt the majority of the population by making goods costly to buy. Also, to counter high inflation central banks can raise the interest rate. This will act as gravity for high-flying equity markets.
- The tactic of Global Aggression: Over the past year, we have witnessed multiple stances of global aggression. Be it, China’s aggression near the LoC of India, China’s aggression towards Taiwan, or the most recent Russia’s locking of its military tussle with EU countries over the Ukrainian borders. Such tension is never proven great for equity markets. Under such circumstances investors, try to reduce their exposure from the equity market & shift their funds towards secure G-Secs ( Govt. backed securities), to hedge their portfolio against any black swan event possibilities. This might further add to rise short-term bond rates, due to high global demands.
- Global response to Covid: As global economies have seen a sharp bounce back from poor economic performance due to covid restrictions, there always exists an over looming threat of new covid variant. Developed nations (Like the EU) have started coming together to provide help to spread vaccination to poor nations (war-torn Syria or other African countries). We can hope for such global cooperation to win against covid together.
Indian Economy
The Indian economy has been regarded as the fastest growing economy, with the Indian govt having given guidance of a GDP growth rate of 9.2% for FY22 in Indian Budget 2022. Yet to better analyze the future outlook for the Indian Equity market, let’s analyze the following factors –
- Alarming Buffett Indicator: As per the Buffett Indicator, the Indian Equity market looks Modestly Overvalued. I have written a detailed article regarding the same (here).
- China-plus-one Theme: In the last 3 Decades, Chian has asserted its position as a global manufacturing house. But in the last few years, the rising labor costs inside its boundaries & its brash geopolitical policies have made many of its importers look for an alternative. Hence, India with its low cost & highly skilled labor demography is well poised to dislodge China as a global production hub. It would be fair to assume that Global companies have started moving their production facilities from China to India (For example — Apple device manufacturer Foxconn & many more to follow).
- Favorable Govt. policies: Irrespective of recent communal tensions & Electoral promises/tensions in local elections, Govt policies at large have been pro-business (For example — Providing various PLI schemes to boost export capabilities of the local economy). Govt has been focusing on privatization for multiple govt owned assets/companies. Overall sentiment across the business group is relatively positive.
- Robust Corporate balance sheet: Upon analyzing the last 2 decades of the Indian growth story, we can infer that — For the 2000–10 decade, Indian growth was majorly driven by Capex (Capital Expenditures). & For the next decade of 2010–20, Companies across the sector have focused on deleveraging their balance sheet with the increasing capacity utilization of added Capex. Hence, It would be very safe to assume that the next decade of India could again repeat the 2000–10 decade story, where growth again be driven by new investments in capacity expansions.
Sectoral Insights
India’s economy is very competitive globally across various Industry sectors, due to favorable demographics & skilled labor. Hence, for the sake of simplicity, I would be briefly touching on the key tailwinds/headwinds related to the following sectors (focus being on Equity market outlook) –
- Banking Sector: The majority of players across the sector have been very aggressive in the provisioning of loans impacted by covid. Hence, as the economy is opening up with strong Capex demand, we can expect that loan uptake will resume & there is also a possibility that NPAs could be well under the provisioning levels.
- Metals & Commodities Sector: Inflations have been very favorable for the metal sector, as it has significantly helped these companies in boosting the top line. But as we enter into the deflationary cycle, these companies may suffer due to lower top line.
- IT Sector: In the last 2 years, the Indian IT sector has witnessed a boom as the world has to swiftly adopt the digital ways of working. Hence, going forward it may face headwinds, not just because of stretched valuations but other factors like — Cooling of IT Capex expenses, Labour shortage due to Great resignations, and, Lower operating margin due to increasing employee wage.
- Manufacturing (Auto) Sector: Global semiconductor shortage has hurt the revival of the manufacturing sector even when the discretionary spending was rising. Though the pent-up demand is still there, that could be verified by the waiting list for any new car purchase. Hence, it is safe to assume that it may see growth in the short term.
- Chemical & Pharma Sector: China plus one theme was visible in this sector, as most of the global players have started moving their supply chain to India, since 2015. This trend has been accelerated during the covid. But having said that, It is observed from the recent quarterly result that most of the companies are suffering from margin contraction due to high inflationary input costs.
- Energy Sector: High crude price globally has been hurting the Indian energy sector. Adding to this pain, Govt has been aggressively regulating the end consumer price to subdue the inflationary cost. Hence, In the short run, this trend may continue but once crude prices revert to mean, Margin realization may improve.
- Real Estate & Hospitality: Historically these two sectors are proven to be high Capex & low return industries. But in the short run, as the economy goes through the unlock phase, we can expect a revival of consumer demands due to high discretionary spending.
Conclusion:
Global sentiments are bleak due to high inflation & geopolitical tension. Whereas, we can see there is multiple growth trigger for the Indian economy. This trigger place India in a great growth trajectory, at least for the next decade. Having said that, there are multiple pockets in sectors that are overheated due to favorable business opportunities. These sectors may face a derating in terms of business growth & valuations.
Yet, even with value migration from one sector to another, the Indian story remains intact for the next decade!
P.S.: Thank you for reading this far. The above article is meant only for educational purposes, hence nothing is investment advice.
In our next article, we will explore the key insights from the Economy Survey of India 2022. (here)
Also, Hope this article has added some value. I’m looking forward to your Likes & Comments.
References:
1. US Inflation — https://www.bloomberg.com/news/articles/2022-02-10/u-s-inflation-charges-higher-with-larger-than-forecast-gain
2. Turkey Inflation — https://www.bloomberg.com/news/articles/2022-01-22/turkey-said-to-see-inflation-rate-peaking-at-about-40-in-2022
3. Chinese Aggression — https://www.bbc.com/news/world-asia-58812100
4. EU Pledge for global vaccination — https://www.europarl.europa.eu/doceo/document/E-9-2021-003867_EN.html
5. Indian Growth Rate — https://economictimes.indiatimes.com/news/economy/indicators/indias-gdp-to-grow-at-9-2-pc-in-fy22-fastest-in-the-world-govt-forecast/videoshow/88761029.cms?from=mdr
