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A peek into Indian Equity Markets by 2020

05 Jan 2023

Three big blows – Brexit followed by demonetization and Fed rate hike – but Indian equity markets have stood resilient given the magnitude of moves. The markets had the backing support of India’s improving macro-economic statistics to avoid seeing a major blip and folding the calendar year 2016 with a 3% return vis-à-vis few global markets that were crushed to pulp.

Though FIIs dumped a record Indian shares over Rs 30,000 crore between October and December 2016, they were back with their purses post Union Budget for FY2017-18. India is better placed than most of its emerging market peers. It is now being considered the engine of global growth. After Brexit, too when developed market yields plunged, global investors thronged to the emerging market particularly India.

What’s luring the FIIs to Indian soils?

The impetus on development has increased few notches with government walking the tightrope of stimulating economic growth through targeted spending while balancing fiscal considerations in its Union Budget proposals. The GST cat in the government’s bag is going to be a major game changer.

This apart, India climbing the economic ladder faster than many other economies is forcing global investors discriminate between geographies and turn back to India.International Monetary Fund (IMF) is projecting that by 2020 India would displace UK and France to assume the fifth spot on the GDP (nominal) ranking.The change of position in world economy has the power to shift many gears.

 

Let’s take a look at what the 2020 window holds in store for the Indian equities:

While India has the highest growth among G-20 countries, by 2020 it is projected to stand tall at USD 4.6 trillion assuming a growth of 3.4 times. The country will contribute 12.2% to global economic growth by 2020.

Favorable demographics would spur development in India even as the world battles ageing population. In terms of consumer spending, India will rival the bigger European markets by 2020 led by expanding urban population, which has sparked a consumer boom. India's pie in world consumer spending is estimated to swell from 1.9% in 2005 to 3.1% in 2020.

That apart India has entered an era of low inflation and high real GDP growth. Even as private investments are still damp, government investments in infrastructure have doubled between 2012 and 2017 to US$ 1 trillion propping the share of infrastructure to GDP ratio to 10%, thus widening the attractiveness of India to the global investor community.

India has been on a growth trajectory, moving forward in a consistent and progressive way. At the same time, no bubble has been created in the country so far.

There is an inflection point where development growth is exponential and India is very close to that point.

Manufacturing and textiles have been picking up. Specialty agro-chemicals would rampantly pick up pace as they are offering environmentally-compliant products, unlike products supplied by China – hitherto ruling Indian soils – which weren’t compliant. 

Other clean initiatives of the government such as funding off-grid solar projects, mini-grids for rural areas and other subsidy-based projects for economically backward regions in India too would lighten up the rural landscape and meet the growing demand for energy and resources.

Domestic tourism is bulging with more visitors thronging Indian destinations. This would provide a fillip to rural Indian economy working hand in glove with from the government-led initiatives for rural development. The growth at grassroots is no glitz and glamour but that is what lays the foundation for wealth creation and upper cascading effect in developing India.

If we are looking to put a figure on the value of indices by 2020 then let us pin some global numbers. During the 30-year span, USAs GDP ballooned approximately 5 times to $14 trillion in 2010 from $3 trillion in 1980. But the Dow Jones stock index multiplied 10 times to 11,000 plus levels from 1,000, even if we set a blinding eye on 14,000 that was hit in early 2007, before recession. So, the stock index bourgeoned twice as fast as the GDP.

Similarities can be drawn across Indian indices Sensex and Nifty, where profit expansion would hold the key to market capitalization to GDP ratio – currently at 88% vis-à-vis 134% of USA. The country’s market cap to GDP ratio is in a benign range and there is huge scope left for growth.

During this exponential growth phase, there are few sectors that would brighten the indices.

Though one always has a fascination to locate new sectors over the next three to four years the traditional sectors of infrastructure, banking, metals, cement, auto and auto ancillary would perform piggy-backing on the “Make in India” move and recovery in cyclical sectors.

The government would have more elbow room to spend as the tax kitty will swell and this money will flow into infrastructure.

As metal prices revive, metal-lined business would revive loan repayments, thus turning the NPA cycle. Savings during demonetisation and seventh pay commissions funds together would lead to credit uptick in car and home loans and structurally boost banks books. The bank’s balance sheets are 0.8% of the GDP, which will surge from 2 trillion to 8 trillion. If we estimate the bank’s balance sheets to prop up by 3-4 times then there is a huge opportunity in banking, within which PSU banks would trump private sector banks.

The big push on housing and infrastructure is likely to tremendously benefit cement sector. However, The export-oriented technology and pharmaceutical sectors, where 60-80% of the revenues come from US, would have to brace for extreme challenges.

Global risks

Muted global economy however, remains a key concern. Though we would like India to stay decoupled, one can’t survive as a decoupled economy.

Signs coming in from the US economy are not very encouraging. Even though there is no growth in the earnings, the Dow is making new highs. The markets that have been heated for quite some time now could see a natural correction. US being the largest economy, an upheaval there can impact Indian markets too.

If a recession or any similar kind of negative developments unravels globally India would face the blow harder than earlier as the exposure to the other economies has risen exorbitantly.

But for the fear of fire, one cannot avoid lighting up the fireplace for much needed heat. Placing investments in domestic consumption driven sectors, could be a bet worth placing.

Happy Investing!

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