Vijay Kumar Gaba: June 2023

Friday, June 30, 2023

Some notable research snippets of the week

CAD slips in FY2023; better prospects in FY2024 (Kotak Securities)

CAD/GDP improved in 4QFY23 led by a narrowing of the trade deficit (goods and services). Capital account surplus moderated from last quarter due to outflows in FPI and banking capital. CAD/GDP in FY2023 was at 2% and BOP at (-)US$9.1 bn with most of the pressure seen in 1HFY23. The external sector balance is likely to be much more comfortable in FY2024 amid a narrowing of goods trade deficit and firm services trade surplus. We expect CAD/GDP to improve sharply to 1% in FY2024.

4QFY23 CAD supported by lower goods trade deficit and steady services surplus: CAD in 4QFY23 narrowed to US$1.4 bn (0.2% of GDP) from US$16.8 bn in 3QFY23. This was led by goods trade deficit narrowing to US$53 bn (3QFY23: (-)US$71 bn) with exports at US$116 bn (US$106 bn) and imports at US$168 bn (US$177 bn) due to lower non-oil imports. Services trade surplus was steady at US$39 bn aided by software exports and professional and management consulting exports. Transfers (remittances) softened to US$25 bn (3QFY23: US$28 bn).

Outflows in banking capital and FPI in 4QFY23 weighed on capital account: Capital account surplus in 4QFY23 moderated sharply to US$7 bn mainly due to banking capital outflows of US$4 bn (3QFY23: +US$14 bn) and FPI outflows of US$2 bn (+US$5 bn). FDI inflows increased to US$6 bn (3QFY23: US$2 bn) while ECB flows increased to US$2 bn ((-)US$2 bn). Due to a weaker capital account, BOP surplus moderated to US$5.6 bn (3QFY23: US$11.1 bn)

BOP in FY2023 slips into deficit and FDI flows reduce sharply in FY2023: CAD/GDP widened to 2% in FY2023 from 1.2% deficit in FY2022. While 1HFY23 external pressures were higher from elevated commodity prices, 2HFY23 pressures eased with narrowing of the goods trade deficit and robust services surplus. The capital account was volatile in FY2023 with a key concern of net FDI flows at US$28 bn, moderating sharply back to the pre-Covid levels (possibly a reflection of the global monetary policy cycle). Banking capital inflows were at US$21 bn (FY2022: US$7 bn) and FPI outflows were at (-)US$5 bn (FY2022: (-)US$17 bn). BOP at US$(-)9.1 bn (FY2022: +US$47.5 bn) along with a large valuation loss of US$19.7 bn (due to USD appreciation against major currencies) reflected in US$29 bn moderation in FX reserves in FY2023.

External sector balances likely to improve in FY2024: Current account pressures are likely to be lower in FY2024 relative to FY2023 amid (1) lower global commodity prices narrowing the goods trade deficit and (2) services trade surplus remaining steady. We estimate FY2024 CAD/GDP at 1% assuming average crude oil price of US$85/bbl (lower effective price due to Russia-led discount) with a BOP surplus of US$12.2 bn factoring in lower capital account (higher FPI flows offset by lower banking capital). We continue to expect USD-INR to trade in the range of 81.5-83 in the near term and average at around 82.7 in FY2024E.

Struggle for investing ideas (Kotak Securities)

We struggle to find ideas in the consumption, investment and outsourcing sectors after the sharp run-up in several of our favored sectors and stocks in the past two months. The BFSI sector is the only sector that offers value although even insurance stocks have rallied in the past few days.

Broad-based rally—reasons not very clear

The Indian market has seen a broad rally in the past few months but headline indices have seen more modest performance. We are not very clear about the reasons for the rally and the divergent performance. India’s continued weak consumption demand should be negative; recent commentaries from companies show no change) for smaller companies while the improved macro in the form of lower inflation and CAD should have been more favorable for performance of large-caps based on better top-down view of India among foreign investors. Large passive FPI flows may reflect that (see Exhibits 7-8). However, the Indian market has lagged most DMs and several EMs quite significantly.

Mid-caps and small-caps doing their own thing

We do not see any particular reason for the excitement in mid-cap. and small-cap. stocks. We note that mid-cap. and small-cap. Stocks have significantly outperformed their large-cap. peers in the past 2-3 months. We can perhaps understand the re-rating seen in certain sectors such as BFSI (smaller private banks), healthcare services (hospitals) and real estate given (1) their somewhat reasonable valuations before the recent rally and (2) strong outlook. However, we struggle to understand the rally in smaller consumption and IT services stocks given continued weak domestic demand (valid for consumption sectors) and weakening global (valid for IT services) demand.

Headline valuations may be misleading

The Indian market valuations may not look very expensive on headline basis versus recent history and bond yields. However, (1) the cheap valuations and (2) the large contribution of banks to overall profits of the headline indices may be holding down overall valuations. We focus on bottom-up valuations but find valuations very expensive in most cases in the context of (1) past valuations that were supported by low global interest rates and (2) future disruption that is not factored in valuations clearly.

Very little value in most parts of the market

The broad-based rally across sectors and stocks in the past few weeks has resulted in rich valuations for the consumption and investment sectors versus history. Most stocks in these sectors are trading at close to or above our 12-month fair values. Valuations of outsourcing sectors may look reasonable versus history but the IT services sector faces both short- and medium-term challenges. Valuations of most BFSI stocks are still attractive despite the recent run-up in insurance stocks.

Monsoon monitor: Rainfall and sowing pick up (Nomura Securities)

Rainfall deficit reduces over the week; pick up likely over coming fortnight: While the first fortnight of Jue-23 started on a weak note (37% below its long period average (LPA)) due to the formation of cyclone Biparjoy, the past week has witnessed a good onset of monsoon across regions leading to a reduction in pan India monsoon deficit to 28% below its LPA. Both India Meteorological Department (IMD) and Skymet weather team have called for a pick-up in rains over the next fortnight; moreover, they have alluded normal monsoon conditions an India in the first half of Jul-23.

Kharif sowing – steps up: The overall area sowing for kharif crops has picked up strongly over the past week with the onset of monsoon, and is currently only c.4.5% below last year levels (vs. 49% decline a week ago). Key kharif crops such as paddy, oilseeds and pulses have witnessed a healthy pick-up in sowing.

Reservoir levels – still strong to support irrigation: While over 65% of Indian agricultural lands (Fig. 11 ) are dependent on monsoon for the cultivation of kharif crops (paddy, maize, soyabean, cotton, sugarcane, etc.), it is important to note that the reservoir levels are above the 10-year average (both on yearly and weekly basis) and should play a crucial role if monsoon falters.

Aluminum: Weakness led by demand uncertainty (IIFL Securities)

Continued weakness in LME Al prices to US$2,135/t is a manifestation of uncertainties on Chinese Real Estate recovery with limited govt support. 23 months of large double-digit decline highlights that on ground, demand uptick will only be gradual. Meanwhile, domestic Chinese supply continues to improve resulting in growing exports. This comes amid a weak outlook for global demand and improving smelter production in North America and Europe, as various key costs (gas, crude, caustic, and alumina) continue to fall.

We expect global aluminium surplus in 2023, which would likely increase in 2024 before normalising, as economic recovery takes hold gradually. This would keep LME Al prices range-bound. We have baked in US$2,350-2,300/t in our FY24-25 estimates.

Demand uncertainty hurting LME Al prices: LME Al price continues to weaken, and at US$2135/t, is well below the average levels seen in 2021/22. Gains seen in early 2023 have all been lost amid sluggish recovery in Chinese Real Estate with weak new starts hurting under-construction work. Other indicators including Industrial output and PV sales are normalising as well. Meanwhile, ex-China demand outlook is weak, driven by slowdown in the western geographies.

Supply position improving in tandem: Supported by healthy production in China, Chinese net export of Aluminium jumped from 238kt in April’23 to 284kt in May’23 – well above the average monthly run rate of 250kt seen since 2020. Production from the North American and European smelters too has stabilised and improved as energy prices have normalised in a significant way. Over the medium term, supply can rise further as Chinese smelters maximise utilisation of capped 45mt capacity. We see surplus over the medium term, albeit one which shrinks as demand recovers.

Steel: Long prices continue to inch down; the prices of flat remain stable (MOFSL)

Long steel prices have been continuously sliding since Mar’23 and are currently trading at Sep’21 levels. Ex-Mumbai benchmark primary long steel prices corrected by INR600/t WoW to INR52,900/t.

· IF route long steel prices witnessed a larger decline due to limited trading activity, as traders and vendors adopt a ‘wait and watch’ approach. The list prices for IF route 10 – 25mm long steel list prices are currently around 50,650-51,000/t. However, actual trades have been recorded at prices as low as INR46,00/t.

· Long steel prices have remained under pressure. Steel manufacturers are dealing with higher inventory (May’23 production up 24% MoM at ~4mt); the project segment has witnessed a lower offtake; traders and vendors are engaging in destocking due to weak demand; and customers are limiting themselves to need-based buying.

· However, domestic HRC prices have remained relatively unchanged with prices decreasing by INR200/t WoW to 55,400/t.

· Export prices from China have inched up by USD7/t WoW and USD27/t since the start of Jun’23 at USD557/t and domestic export prices are at USD565/t. As steel prices in the export market are almost at par with no headroom for arbitration, India has not seen any major import bookings over the last week.

· As Chinese as well as Vietnamese offers have firmed up, Indian merchants are finding it less attractive to procure from international markets. This has had a positive impact on HRC prices as they have remained relatively immune to the recent price correction observed in long steel products.

· However, even though the inventory with traders and vendors are at recent lows, they are awaiting clear macro-economic signals and list price announcement by steel mills for the next month.

· However, we believe, steel prices which have corrected almost 10%-15% since Feb’23 have neared its bottom, and hence, we believe the majority of the downside has been priced with no major price correction expected in the near term.

Key downside risk: China economy is showing signs of a slowdown with lower-than-expected real estate and automobile sales. If the government fails to implement stimulus to support the struggling economy and fails to excite the sector as it has done in the past, it could have a cascading effect on all industries, particularly metals sector.

Banking: Balance sheet strength to sustain though RoA peaking (ICICI Securities)

Despite the initial scare, the Indian banking system has emerged strongly post the covid pandemic in the form of all-time high CET 1 levels, decadal low gross /net NPAs and strong contingent provisions. FY23 has been a good year for the banking system with credit growth touching multi-year high and NIMs rising to the highest level in a decade. Strong NII growth has more than offset small headwinds on treasury and opex intensity, driving the highest RoAs / RoEs in the last 8-10 years. Going ahead, credit growth is likely to decelerate, but should still be healthy at 13-14% CAGR over FY24-25E, in our view.

Post 21-23% YoY rise in NII and core PPOP in FY23, we see growth tapering down to 13-15% YoY in FY24E (and then improving to 15-17% YoY) for our coverage private banks. As against 35-40% YoY growth in the last 2 years, we see PAT growth for our coverage private banks moderating to ~15-16% for FY24/25E. Unlike steep rising RoAs /RoEs trajectory in the last 3 years, we see broadly stable RoAs / RoE for FY24-25E, which along with slight moderation in credit growth / NIMs, which could limit the re-rating potential of valuation multiples in the near term, in our view.

However, strong double digit book value growth, strong balance sheet and reasonable valuations provide comfort. We prefer stocks that can deliver strong growth (both deposits and advances), have rising RoAs, visibility of MD & CEO continuity and reasonable valuations.

Credit growth to moderate to 13-14% CAGR vs ~18% of recent peak...: Credit growth started FY23 with 11.2% (YoY) and reached the peak to 17.9% (YoY) in Oct’22, partly on pent-up demand. However, a steep 250bps repo rate hike during May’22 to Feb’23 period led to a steady moderation in credit growth to ~15.0% by Mar’23. It is important to note that our bottom-up calculations aggregating >90% of the system by loans suggest credit growth stood at ~18% YoY for FY23 (vs ~20% YoY in Q2FY23). While the divergence is huge, it is not uncommon as the date for both datasets are different.

The key takeaway is that we have already seen around 200-300 bps moderation in credit growth from the recent peak and estimate further moderation limited up to 200bps. We expect systemic credit growth to moderate to 13-14% for FY24-25E (vs 15% YoY in FY23). We estimate loan growth for our coverage private banks at >16% YoY for FY24E vs ~18% in FY23. We expect SBI to grow largely in line with the overall system. There has been divergent approach to loan growth for private banks and PSBs. Unlike the initial 3 quarters of FY23, Q4FY23 saw private banks delivering higher growth QoQ vs PSBs and we expect the trend to sustain.

...which along with moderating NIMs should lead to moderation in PAT growth: FY23 has been a good year for the banking system from NIMs perspective with sharp rise in yields under EBLR regime and contained rise in the cost of deposits (due to healthy liquidity / lower LDR). Most of the banks (barring CUBK and Bandhan) have seen healthy NIMs expansion YoY. As per our calculations, NIMs expansion was visible in Q1FY23, gained pace in Q2FY23 and seem to have peaked in Q3/Q4FY23. Apart from rate cycle, there have been some structural drivers for NIMs expansion in the form of lower net slippages, reduction in net NPAs, and favourable loan mix (stronger growth in higher yielding segments such has unsecured / business banking / MSME etc.), which should continue to support NIMs going ahead. We model-in 10-20 bps NIMs decline YoY for FY24 though highlight that quarterly NIMs decline from the recent top could be as steep as 50bps YoY for select banks. Despite moderation, we see FY24 NIMs to be still better than earlier years barring FY23. We expect FY24 NII growth to moderate sharply to ~13-14% YoY, within which H2FY24 could see even sharper moderation YoY on high base.

Easing of Liquidity Unlikely to Push Down Lending Rates (India Ratings & Research)

Significant Improvement in Banking System Liquidity: The liquidity in the banking system has improved meaningfully starting from the second half of May. Overall, the net liquidity adjustment facility balance clocked INR2.4 trillion in the first week of June as opposed to the average INR0.5 trillion in April. The improvement in liquidity has largely been caused by the Reserve Bank of India’s (RBI) dividend transfer (INR874 billion) and subsequent spending by the government, an improvement in FPI flows (1QFY24: INR817 billion; till 20 June) and withdrawal of INR2,000 currency notes.

Ind-Ra expects the surge in liquidity (partly due to base money creation M0) will be adequate for 2QFY24, and therefore will ease financial conditions, based on the assumption of moderate-to-neutral net balance of payment surplus/deficit.

Asymmetric Liquidity and Conservative Approach by Banks: While the banking system has shown a surge in liquidity on a net basis, all banks are not in surplus. This has reflected in elevated borrowings from the marginal standing facility window. In addition to that, the muted response in the Variable Rate Reverse Repo (VRRR) auction further showed the banks’ conservative approach (Figure 1). The diverse nature of banks’ behaviour, as reflected in the divergence trend between high surplus liquidity and muted interest in VRRR, is actually the minimal opportunity loss between VRRR (in general average rate of VRRR) of 6.49% and standing deposit facility of 6.25%, in relation to the prevailing uncertainty in the system liquidity.

Broad Based Deposit Rate Stabilised: Ind-Ra believes deposit rates in the banking system have stabilised, driven by a moderating credit demand and the easing liquidity in the banking system. However, the agency does not see any fall in deposit rates, especially in the retail segment. The reason being, banks are still facing challenges because of multiple products in the financial market against long-term, stable deposits. Moreover, the merger of the largest housing finance company HDFC Limited with the HDFC Bank (IND AAA/Stable) will necessitate a higher demand for deposits to replace existing liabilities in the books of HFC. Moreover, in an uncertain environment of healthy credit demand and volatile liquidity and rising issuances of certificates of deposits, banks will continue to focus on strengthening their deposit base.

Lending to Continue to Face Upward Bias, albeit at a Moderate Pace: Given the large part of the incremental credit disbursement has been supported by the drawdown of cash flow with the RBI in lieu of Reverse Repo in FY23, the impact of marginal cost of funding has so far been limited. However, Ind-Ra opines that the incremental funding by banks in FY24 would have to be done by way of fresh deposits, therefore the marginal cost of funding will go up reasonably. Overall, deposit rates in the banking system have shot up by 150 to 200bp in the past one year, which has resulted a 75bp increase in aggregate deposits in the system.

Easing of Money Market Rates: Overall money market rates have softened in the last fortnight, owing to the significant improvement in banking system liquidity. The agency expects the overall liquidity to remain supportive in the coming three to four months. Therefore, overall rates in the money market will remain soft, however a significant fall in them is not expected owing to a likely pick-up in issuances.

Wednesday, June 28, 2023

Chosen the wrong template

Continuing from Tuesday (Nine years of continuity and low growth), I must say one key area of sub-optimal by the incumbent NDA-2 government is management of human resources. Despite massive public campaigns, the investment in education, skill developments, and employment generation opportunities have been found lacking. Meager budget allocations have been made for capacity building in the areas of education and skill development. In fact, the capital expenditure budget was sharply cut for school & higher education and skill development in the union budget for FY24. A meager sum of Rs99.2cr was allocated towards capital expenditure on skill development.

The successive governments in India have been consistently ignoring the fact that the global community has always valued resource rich nations and expected them to behave in a responsible manner to preserve the global order.

· The capital rich western world is expected to help the poor and starved of the world. The world looks forward to funding technological advancement, preservation of cultural heritage, assisting global growth and development. Even after taking full cognizance of the blemished legacy of imperialism and suppression, I believe that financially rich communities have worked for the betterment of human life by funding technological innovation, life science research & development, productivity enhancement, and development assistance to the economically underprivileged world.

· Similarly, nations rich in natural resources like minerals etc. have been expected to prospect and exploit these resources in optimum manner to assist the sustenance and growth of the global economy. For example, in spite of frequent allegations of cartelization and supply manipulation, OPEC has been mostly successful in maintaining petroleum market equilibrium.

The point is that since India now possesses the largest pool of prospective workers for the world, it is our responsibility to prospect, grow, and develop this resource for the benefit of the global community! This becomes even more pertinent in the context of the current global financial conditions. In places like Europe and Japan the root cause of the crisis could be traced to the aging demographic profile. China is also likely to join the club soon. Under the circumstances it is the responsibility of India to provide educated, skilled and trained workforce to the global economy.

A number of research papers and surveys have shown that (a) Child and mother nutrition level in India is sub-standard consequently child mortality rates are poor; (b) higher and professional education standards are extremely poor consequently a large number of Indian graduates are unemployable even in routine jobs; (c) There is acute shortage of competent scientists to scale up research and development (R&T) activities to make Indian businesses competitive at global stage.

The consequences are low proportion of labor force and even lower labor force participation; especially in case of female workers. As I highlighted last week (see here), for urban females in India, labor force participation rate is a dismal 18%. Even for young females (15-29yrs of age) it remains materially lower at19.3% (vs 57.6% for males). Youth unemployment in urban areas is very high at 17.3% (22.9% for young females). In some states like Assam (41.7%). Himachal (49%), Kerala (42.8%), Rajasthan (43%), and J&K (59.3%) urban unemployment rate amongst young female workers is running at over 40%.

It is cause of grave concern that the unemployment remains materially higher amongst the young workers (17.3%) as compared to overall unemployment level in urban areas (6.8%). The reasons for this may include unemployability (skill mismatch and/or sub-standard education), reducing employment intensity of GDP, and poor employment growth in manufacturing sector. Besides, persistently, high ratio of self-employed and casual labor, inter alia, indicates (i) lower employment elasticity in the organized sector and (ii) skill mismatch.

Unfortunately, the results of the latest (7^th) Economic census launched in 2019 are not yet released, so we will have to rely on the outcome of 6^th economic census (2013-14) for the sake of argument sake. Anecdotally, I can vouch that the trend has not reversed in the past one decade. In fact, the conditions are more likely to have deteriorated, if we consider the latest Annual Survey of Industries (2019-20).

As per the 6^th Economic Census, there were 58.5mn business establishments (excluding public administration, crop production & plantation, defense and compulsory social service activities) operating in the country. Of these ~96% establishments were privately owned while just ~4% were government owned. These establishments employ 131.29mn people (52% in rural areas and 48% in urban areas).

· Out of total ~58mn establishments about ~72% were Own Account establishments (meaning with no hired worker). These Self Owned Establishments (SOEs) grew 56% during 2005-2013. About 63mn people (48% of total employed people) are employed in these SOEs.

· The government or public sector employs only 7% people. 79% of people work in proprietary establishments. Organized private and cooperative sector employs 14% people.

· About 36% of business establishments were operated from the home of the Self Owner, while another ~18% operated from outside the home without any fixed structure.

· Retail trade (~35%) and Manufacturing (~23%) were dominant non-agricultural activities.

A June 2014 working paper released by RBI, concluded that aggregate employment elasticity (change in employment due to economic growth) of Indian growth has fallen considerably in the post 1991 period. In this period for every 10 per cent change in real GDP, there had been about 1.8-2 per cent change in employment. The current statistics are even poor.

Moreover, elasticity varies considerably across sectors. While agriculture has witnessed negative elasticity, services including construction have generally been employment intensive. Manufacturing employment elasticity has hovered in the range 0.29-0.33.

Within manufacturing, the employment elasticity for organized manufacturing sector based on various estimates seems to be higher, in the range 0.42-0.57 for 2000s and it has risen over the previous two decades. Given the huge productivity and wage differentials between organized and unorganized sectors, greater employment generation in organized manufacturing is crucial as it has larger multiplier effects.

The working paper suggests that going forward, it is the relative cost of capital vis-à-vis labour and the nature of investment demand that will determine to what extent growth would be job-creating. Increased capital to labour ratio in the organized sector for a labour abundant country like India is a concern that has been well-highlighted. If India has to meet the demographic dividend challenge, focus should be on industries where employment elasticity is higher. Roughly, in India over 10 million people would need a job every year for the next 15 years. Finding productive jobs for such huge numbers is a big challenge, and clearly the answer lies in stepping up growth, and importantly, stepping up the employment intensity of growth.

In this context, the findings of the latest Annual Survey of Industries (ASI-2020) are noteworthy.

As per the ASI-2020, the addition of net new manufacturing units in India has been very low. Moreover, the factories have become more relatively capital intensive. The average fixed capital per factory increased 43% from Rs12.78cr in ASI-2013 to Rs18.33cr in ASI-2020 (a part of higher amount could be attributable to cost inflation); but the number of employees per factory increased only 17% from 56 to 66. Net value-add per factory in operation increased ~27% in this period from Rs4.82cr to Rs6.11cr. This barely covers the inflation.

The worst part is that only ~6.6% operational factories were located in the most populous state (Uttar Pradesh); while Tamil Nadu accounted for ~16% of total operational factories.

Three trends could be reasonably deciphered from this Survey:

1. In the past 10yrs the capital-intensive large industries have grown at the expense of labor intensive MSME and household sector industries.

2. The employment intensity of the Indian manufacturing sector continues to decline. The employment intensity of the agriculture sector is already negative. These are the areas where over 70% of the workforce is employed or seeking employment.

3. The government incentive schemes to promote industrial growth (e.g., PLI) are yet to show any meaningful impact. Some recent reports indicate that against a total budget outlay of Rs 1.97 trillion, so far only Rs29bn have been disbursed under 14 PLI schemes.

In conclusion, the solution for the unemployment problem in India lies in promotion of cottage and MSME units and not fancy large manufacturing plants. The government’s focus should be on skilling youth and enabling the setup of high-quality cottage and MSME sector that could become ancillary to large OEMs in India and abroad. The development of the Auto industry during the 1990s and 2000 is the classic template that should have been adopted for overall industrial growth. Unfortunately, it does not seem to be the case so far.

Tuesday, June 27, 2023

Nine years of continuity and low growth

Last month the incumbent NDA government completed nine years in power with BJP having full majority in the Lok Sabha on its own. In the 2014 general election, it was after three decades (post the landslide win of the Congress party led by Rajiv Gandhi in 1984) that a single party (BJP) had secured over half the seats in the Lok Sabha. Obviously, the people had great hopes from the new government that has won their confidence on the promises of a corruption free regime with equal opportunities (Sabka Saath Sabka Vikas).

For the 5years (2014-2019) the Indian economy (Real GDP) grew at a CAGR of ~7.4%, slightly better than the CAGR of ~7.1% during the previous five-year term (2009-2014). In 2019, the BJP returned to power with an even larger majority. During the first four years of the current term, the Indian economy has grown at a CAGR of 3.1%, the slowest pace of growth achieved by any government in the post liberalization (1991) era.

The best growth trajectory was seen during UPA-1 tenure when the economy managed to grow at a CAGR of 8.52% (2004-09). This was perhaps the outcome of massive reforms implemented by the preceding NDA-1 government (1998-2004); in which monopolies of the government over the core sectors like power, mobile telecom, coal, roads, oil & gas, airports, ports, etc. were divested. NDA-1 also implemented massive investment-oriented policy initiatives like SEZ, NHDP, PMGSY, Missile & GPS development, UMPP, NELP, etc. that led to accelerated investment and growth in the following decade.

The UPA government (2004-2014) earnestly took forward the reforms initiated by the NDA-1. It substantially liberalized the FDI regime; signed the Civil Nuclear Deal to usher a new era of strategic partnership with NATO & NSG; and introduced the first universal basic income scheme in the form of MNREGA and food security scheme in the form of National Food Security Act 2013.

Most important, it laid the foundation of complete digitization of the Indian economy in the ensuing decades by creating robust platforms like UIDAI (Aadhar) and NPCI (UPI, Fastag etc.); and laying an aggressive roadmap for financial inclusion in the budget speech of FY11 in accordance with the recommendation of the Rangarajan committee (2008).

The financial inclusion roadmap required banks to reach 73,000 rural habitations with a population of over 2000 by March 2012, using information and communication technology-based models and banking intermediaries (Business Correspondents). RuPay – an Indian domestic debit card, introduced on 26 March 2012 by the NPCI was a key landmark in this journey. Basic Savings Bank Deposit Account (BSBDA) along with BC proved extremely successful in increasing the total number of banking touch points from ~67k in FY10 to 586k in FY16 (RBI Annual Report FY17). (BSBDA was rechristened as Jan Dhan Yojna- PMJDY with enhancement of scope to include some other financial services within its ambit.)

The UPA government also introduced The Constitution (115th Amendment) Bill, 2011 to implement a common nationwide GST based on Ajit Kelkar committee (year 2000) recommendations; though the bill could not be passed due to opposition from other parties. The UPA government also introduced The Real Estate Regulatory Authority (RERA) Bill in August 2013. The bill was referred to the standing committee of the parliament, which submitted its report after considering public comments in February 2014. The Bill therefore could not be passed during UPA-2 tenure.

It could be argued that sub-optimal performance of the economy in the past four years is primarily due to the impact of Covid-19 pandemic that shutdown the economy for almost 6 months in 2020. In my view, however, the argument could be accepted only as partially valid. Most previous regimes had also witnessed massive disruptions and displacements like the financial sector crisis (failure of UTI, ICICI, IDBI, ICICI etc.); Asian currency crisis (1997), global economic sanctions post 1998 nuclear tests; dotcom burst; global financial crisis (2008-2010); energy inflation due to wars in the Middle East Asia; banking crisis due to collapse of infrastructure sector that was used to stimulate the economy since 1998 with numerous unsustainable projects; political instability (three election in three years 1996-1998); Kargil War; incoherent political alliances (especially UF, NDA-1, UPA-1) etc. Despite all this, most governments could achieve a higher growth rate than what we have seen in 2019-2023.

It is evident from the pace of highway construction, digitization of the economy, financial inclusion, and extension of universal basic income schemes, etc., that the incumbent government has pursued the programs and policies initiated by the previous governments and continued to build upon the platforms created by his predecessors. Schemes like PLI have also set ambitious targets; even though the results so far have not been encouraging.

However, we have not seen any transformative policy initiative that can lend the necessary velocity to the economy to catapult it into a higher orbit. There is little progress in the areas of agriculture reforms, disinvestment etc. Fiscal sustainability has remained compromised, as the debt burden has continued to increase. The private capex has mostly remained evasive due poor demand conditions and risk averseness of banks. Though the situation has shown marked improvement in the past 15-18months. The price situation has remained volatile, mostly governed by external factors like global prices of commodities and weather conditions. There is little evidence to show that the government and/or RBI have any plan in place to control the volatility in prices.

In my view, however, the worst aspect of the current regime has been the failure to ensure adequate employment, especially in the manufacturing sector. More on this tomorrow.

Friday, June 23, 2023

Some notable research snippets of the week

Key economic trends (Elara Capital)

· Deflationary impulses seem entrenched in the global economy. We believe global inflation may surprise on the downside through rest of CY23E.

· We see the Fed pausing even in July 2023 meet – Expect the first rate cut by the Fed in Dec-23.

· Historically, equities perform better in a hike cycle than a cut cycle. Bonds are a better bet in run up to rate cut cycle. Gold is the preferred commodity asset through both hike and cut cycles. The USD-INR usually fails to capitalize on the overall EM FX risk on sentiment in the run-up to a rate cut by the Fed.

· Deflationary producer prices in China suggest weakening growth in G4 – the US, the EU, the UK and Japan. We do not rule out a sub 5% GDP growth in China in 2023E. (base case 5.2%)

· India remains in sweet spot compared with the global economy. FY24E GDP is likely at 6-6.2% YoY, CPI inflation to average 4.9% and CAD likely at 1.2-1.3% of GDP. Expect the first rate cut from the Monetary Policy Committee (MPC) in Q4FY24.

· Expect India 10-year yield at 6.75% by March 2024E, led by low inflation, rate cut by the MPC and lower supply by the states. See US 10-year yield at sub 3% by March 2024E.

China outlook: Muddling through (Danske Bank)

After a strong start to 2023, economic data disappointed in Q2 and we have lowered our GDP forecast for this year to 5.8% from 6.2%. For the rest of 2023 our scenario implies muddling through with annualized quarterly growth around 41⁄2-5% underpinned by moderate stimulus. In 2024 our forecast is reduced to 4.8% from 5.0%.

• The main engines of growth are set to be private service consumption and a gradual recovery in construction and private manufacturing investments. We expect export growth to remain weak as global goods demand stays soft.

• While a leading role in many green technologies benefit China, a long list of medium term economic challenges are present, which creates uncertainty about China’s outlook. However, we still look for economic growth to be able to reach around 41⁄2% over the next 5-10 years due to a strong focus on investments in education and technology and continued support to the private sector.

• Geopolitical tensions are set to continue with intense rivalry between US and China. However, we still see a low probability of war on Taiwan in the next 2-3 years as the costs of a war would be enormous for all involved parties. In the long term the risk is real, though. Look out for Taiwan election in early 2024.

New uncertainties: While China’s re-opening rebound in Q1 was stronger than expected, the recent economic data have slowed more than projected. In effect, we have lowered our forecast back below 6% for this year. Especially manufacturing and the housing market lost pace in April and May while the service sector has continued to grow at a more robust pace reflecting pent-up demand from the zero-covid lockdown years.

The bumpy road of the recovery leaves a high degree of un-certainty about the outlook. However, our baseline scenario is for policy makers to aim for growth around 41⁄2-5% rest of the year and that stimulus will be calibrated to hit this goal. The strong service sector activity is providing decent job growth and more support to wage growth, leaving a decent picture for household income gains. Hence we expect private consumption to continue to underpin a moderate recovery. The manufacturing sector is challenged by a weak external environment but moderate growth in investments and consumption is expected to underpin manufacturing growth at or slightly above potential growth. The construction sector is still struggling but we have witnessed a lift in home sales compared to the very low levels last year, and we should see this gradually feed through to a rise in housing starts.

In the medium term, there is little doubt that China’s potential growth rate has come down as China faces challenges on many fronts: high debt level in key sectors, falling labour supply, Western technology restrictions, geopolitical uncertainty and a difficult transition to consumption driven growth. Our baseline scenario is that China will be able to grow around 4% on average over the next 5-10 years. While clearly lower than in the past, it will still make Chinese economy significantly bigger and in our view lead to a rise in the middle class by 3-400 million people over the next decade.

Deficit monsoon and delay in kharif sowing, but not yet alarming (Nomura Securities)

First fortnight of June-23 witnessed monsoon deficit – 37% below the long period average (LPA). The onset of monsoon in 2023 was delayed by a week with Kerala receiving the first rain showers around 8 June-23. While the formation of cyclone Biparjoy resulted in surplus rainfall in the states of Gujarat and Rajasthan, it weakened westerly and south-westerly winds delaying the advancement of monsoon in Maharashtra (one of the key agrarian states in West India).

No impact in the north India region: North India agrarian states (such as Uttar Pradesh, Bihar, Punjab, Haryana, etc.) witnessed a large deficit to their LPAs; however, it is key to note that historically, the onset of monsoon in North India takes place in July and deficit monsoon conditions in June are a normal phenomenon in the region.

Pick-up in rains likely over next fortnight: India Meteorological Department (IMD) and Skymet weather team both have called for pick-up in rains over the second half of June-2023, with the advancement of monsoon in western and central parts of India; moreover, they have alluded normal monsoon conditions pan India during the first fortnight in July-2023.

Delay in kharif sowing, but not yet alarming: In 2023, the agriculture season witnessed some delay in rabi harvest in April; the delayed onset of monsoon has also resulted in some delay in the sowing of kharif crops. While the kharif sowing data for the first fortnight of June is much below 2022 levels, sowing activities are expected to pick up over the next 3-4 weeks with normalcy in monsoon conditions.

Strong reservoir levels to support irrigation: While over 65% of Indian agricultural lands are dependent on monsoon for cultivation of kharif crops (paddy, maize, soyabean, cotton, sugarcane, etc.), it is important to note that the reservoir levels are above the 10-year average and should play a crucial role if monsoon falters.

No signs of softness in consumer demand visible yet with delayed onset of

monsoon: While rural market demand has been showing signs of recovery over the past two quarters, the pace of improvement has been gradual due to the delay in agriculture activities. We note the full benefit of the harvest money is yet to be seen translating into product / consumer demand. Further, the stable / softening raw material prices have resulted in price cuts across all large FMCG categories; we believe this will likely act as a stimulus to drive volume growth in the rural markets. Hence, we do not expect any softness in consumer demand with no ebbing effect on sentiments due to monsoon conditions.

India Durables and Electricals (Jefferies India)

Softer offtake in Apr-May23, also impacted by unseasonal rains. But demand has improved in H1-Jun. Transition to new BEE norms is largely done for AC & Fans, and older inventory is liquidated.

Channel inventory is normal at ~3 weeks. No major price hikes in Q1, expect +1-2% in Cables & Wires (copper pass-through).

Changing Weather Patterns Influence Demand: We spoke to ~10 channel partners pan-India. Many cited weaker offtake in Apr-May23 due to softer consumer sentiment and unseasonal rains in many parts. But Jun'23 saw better demand for summer-centric products i.e. ACs, Coolers, Fans etc.

1) Fans market has now transitioned to new BEE norms. Sales have largely normalized, with higher shift to premium/BLDC models - increasing awareness for energy efficiency.

2) Cables & Wires demand stayed strong for most dealers, with minimal impact of pricing action. Offtake here is mainly driven by construction and capex / infra projects.

3) Washing Machines demand has not seen any material uptick in the last few months, with flattish sales YoY. Q1 (Summer) is seasonally weak qtr.

4) Appliances: Many dealers cited healthy demand trends, esp in Mixer Grinders, Chimneys and Hobs.

5) Water Heaters saw mixed trends with some dealers highlighting better offtake due to unseasonal rains. A few dealers cited higher inquiries, but unavailability of SKUs in summer season.

6) Weareables & Hearables demand good.

Inventory now Largely Normal: AC channel stocking commenced in Feb-Mar23. Muted traction in Mar (unseasonal rains) led to higher than normal inventory in Apr for most dealers, which subsequently declined in May-Jun as offtake improved. Now inventory is at normal levels (~3 weeks) for most dealers, as summer season ends. In Fans, inventory has normalized post BEE transition, wherein inventory of old models has largely liquidated.

Cables and wires inventory is currently normal level (~2 weeks), as supply is typically received

within a week for most dealers.

No Major Price Hikes in Q1: Post BEE transition, prices were hiked by avg 2-5% in new AC models and avg 5-8% in new Fan models in Q4FY23. Air Coolers have seen price hike of 3-5% at the start of summer season. But since then, there has been no material price hikes in Q1FY24, as many input costs have softened. With rise in LME copper prices (+5% from 10May'23), Cables & Wires category has hiked prices by avg 1-2% in May and more hikes could be seen in coming weeks.

Competitive Landscape: In ACs, post BEE transition, LG models are offering higher energy savings (technology) vs many peers. Lloyd (HAVL) sales have been good in price-conscious consumer segment. VOLT sales are healthy in the 1.0-1.5 ton category.

Retail fuel price cut an overhang for CGD stocks (Nirmal Bang Equities)

For the imminent cut in retail petrol/diesel prices. We believe this would reduce the tailwinds for OMCs. Such a cut also poses a risk to CGD companies as the latter would be forced to cut CNG pump prices to maintain CNG growth rate, which entails a sacrifice in EBITDA/scm. Such a cut and the steep YoY decline in GRMs could dent the potential upside to OMC earnings in FY24, implied at current juicy retail margins.

Impending cut in MS/HSD prices poses risk to CNG business outlook: The impending cut in MS/SHD pump prices is likely to eat into the cost savings offered by CNG over MS/HSD, currently at 40%/20%. This combined with the fact that the APM gas price is likely to remain fixed at the ceiling of US$6.5/mmbtu (GCV), as per the latest gas pricing formula, leaves no elbow room for CGD companies.

This leaves IGL and MGL vulnerable to either a hit on margins if they seek to maintain growth or cut in CNG volume growth assuming they aim to preserve margins. GGL is relatively less impacted as its share of CNG is under 30% vs more than 75% for IGL/MGL. If OMCs were to cut MS/HSD prices by Rs1-5/litre at current crude price levels, it implies 3.3-16.5%/2.3-11.3% hit on IGL’s/MGL’s FY24E EPS vs 1.3%-6.3% hit on GGL’s FY24E EPS – assuming the cut in CNG price from Aug’23 post 1QFY24 results of OMCs.

The steep correction in diesel spreads from muti-year highs by more than 50% to ~US$15/bbl combined with the decline in crude oil by 10.8% YTD and 34.5% YoY has resulted in average retail fuel margin surging to ~Rs7.2/litre in 1QFY24 vs ~Rs2.5-3/litre in 4QFY23 – petrol/diesel retail margin per litre is estimated at Rs5.2/Rs7.9. This is likely to support hefty growth in earnings for OMCs in 1QFY24, as per our first cut estimates, and perhaps in 2QFY24 as well, depending on when OMCs decide to cut pump prices of MS/HSD.

2HCY23 revival in China demand clouds retail margin outlook: IEA and other global oil watchdogs expect a revival in China’s economy to spur growth in oil demand ahead of supply in 2HCY23 and thereby boost oil prices. This is a concern cited by OMCs to go slow on the current demand for a cut in Indian retail pump prices, as a future rise in oil prices post such a cut could again put pressure on marketing margins and earnings for OMCs. NBIE Brent oil forecast for FY24E/FY25E is US$75/bbl and US$70/bbl. This compares with FY23/4QFY23 average of US$95.3/bbl and US$81/bbl. However, a recent Reuters report shows that diesel and petrol exports from China in May’23 were up 4x YoY to 0.6mn tonnes and by 67% YoY to 1.36mn tonnes, respectively. This is due to the persistent slowdown in China’s property/industrial sectors and refining throughput in May’23, nudging the record figure of 14.9mn bpd in March’23.

Volatile refining margins may find limited solace from Russian crude: The GRMs reported by OMCs are likely to see a significant decline YoY in FY24 due to the steep decline of 47.2% in diesel spreads to US$15//bbl in 1QFY24 from 4QFY23. Even with the share of Russian crude indicated at 15% in HPCL and more than 30% in BPCL/IOC, the implied savings of ~US$1.2/bbl to US$2.4/bbl is unlikely to reverse the YoY decline in GRMs. 1QFY24 petrol/diesel spread over crude is down 43%/60% YoY to US$15.5 per bbl/US$15.1 per bbl. The pressure on OMCs to cut prices overlooks the impact of declining oil and fuel spreads, which imply potential inventory losses that could eat into the gains in retail margins from the lower crude prices.

Textile: Global retailers underpin improved inventory position by EoY (JM Financial)

Global retailers continue to lighten their inventory position: Global retailers during their latest earnings have continued their efforts to reduce the excess inventory on books. GAP saw inventory decline of 27% YoY in the latest quarter and expects inventory to be down significantly more than sales as compared to FY22. TJX and Nike (apparel segment) given their sharp focus on liquidating excess inventory have been able to achieve lower inventory. Large retailers like Walmart, Target and Costco have also lowered their inventory given their cautious approach towards fresh procurement. The global demand outlook for CY23 continues to be soft.

Indian textile players expect demand revival from 2HFY24: Indian Home textile and apparel exporters expect demand to remain muted in 1HFY24 on account of excess inventory liquidation. Any normalisation of demand in CY24 amidst improved global retailers’ inventory position leaves headroom for export demand recovery by Indian exporters.

‘China + 1’ theme picking pace: China has been losing market share across the world (refer exhi. 3/4) apparel exports aided by rising labour costs and geopolitical tensions. This has led to a potential shift of exports from China towards other countries, creating new opportunities and growth in the other Asian countries for the apparel industry. Some of the biggest brands across the globe have already begun reducing their exposure to China over the past few years. We believe India’s competency across factor cost and a well-established textile ecosystem (across cotton segment) will allow it to benefit from the ‘China+1’ theme.

UK FTA offers additional growth opportunity: UK imports USD$24bn in apparel with India’s share a mere USD$1.4bn. In contrast, UK imports UD$4.5bn from Bangladesh and US$ 6.2bn from China. Indian players have lower market penetration in UK due to tariff disadvantages vs Pakistan, Turkey, and Bangladesh. However, FTA with UK will allow duty free exports to UK, improving India’s competitiveness. A ~20% market gain from China over the next 3-4 years is required to help India near double its exports to UK. Effective implementation of UK FTA could provide a clear runway for double digit revenue CAGR in case of Indian textile exporters over the coming decade.

Commodity deflation to aid margins: Decline in cotton / yarn prices over the last 12 months to the tune of ~40%/33% is likely to aid margins for Indian textile players. Lower demand and arrival of new crop are key reasons for the price correction. Further, improving scale in 2HFY24 will aid margin expansion for textile companies.

Stable duty regime and additional steps by Govt to aid the textile ecosystem: The scheme of RoSCTL that was effective from March 2019, has been extended till March 31, 2024 for exports of apparel/garments and made-ups in order to make the Indian textile sector competitive in the international market. The maximum rate of export rebate for apparel is 6.05%; while for made-ups it is 8.2 per cent. A stable duty regime is likely to benefit the sector. Further, additional initiatives like the PLI’s, Mega Integrated Textile Region and Apparel (MITRA) Parks Scheme and National Technical Textiles Mission will help in creating a conducive textile environment.

De-leveraged balance sheets offers room to chase growth: Indian textile companies have de-leveraged their balance sheet over the past few years offering room to chase growth expected from ‘China+1’ theme playing out and possible UK FTA.

Moderate valuation multiples leaves ample room for multiple re-rating: Textile companies currently trade at moderate valuation of leaving ample room for re-rating as when structural demand drivers (UK FTA/ ‘China+1’) kick-in.

Cement: Start of an upcycle (Antique Stock Broking)

FY24 volume growth could surprise—we now factor in 10% YoY growth Public capex (center, state, and PSUs) comprising 25% of total gross fixed capital formation (GFCF) is likely to grow at a healthy 23% YoY in FY24 (ahead of the upcoming Union Election), driving aggregate nominal GFCF growth by a robust ~14.8% YoY. Besides, housing demand recovery is likely in the midst of a multi-year upcycle. Accordingly, FY24 cement demand growth could surprise positively, in our view. With early cement demand trends suggesting near mid-teens YoY growth on a low base for 1QFY24 (5-yr. CAGR of 5.5%), most managements have likely extrapolated this trend and guided/ aspired for >15% YoY volume growth for FY24 during the 4QFY23 earnings call. We now factor higher 10% YoY (5-yr.

CAGR of 4.8%) demand growth for FY24 (vs. 8% earlier) to >440 mtpa leading to 3%-4% upgrade to our FY24-25E volume growth estimate mainly for large companies.

The third consecutive year of high demand (7%–10%), could drive utilization to a 14-year high Demand at 8.5% CAGR vs. 5% supply CAGR over FY22-24E would results in pan-India cement utilization inching up to a 14-year high of 77% and clinker utilization of 80% in FY24. South utilization could cross 65%, while ex-South utilization would inch closer to 84% after 14 years in FY24. Ex-South utilization (excluding 6 mtpa Sanghi and 9 mtpa JPA, which are non-operational/partially operational for FY24) is inching closer to 87%/ 88%. More importantly, our coverage universe as well as UTCEM's utilization increased from an average of 73%/74% during FY20-22 to 81%/83% in FY23 and is likely to inch up further to as high as 83%/88% in FY24-25.

Higher consolidation in the industry

The top 6 companies enjoy 80–85% capacity share across all regions except the South and with more capacity likely to be announced by large companies and with a couple of M&A transactions likely to consummate soon, capacity/market share of large companies is likely to increase further.

Costs side pressure to recede; cost efficiencies to further aid profitability

International petcoke and coal prices are down ~50%-60% from their respective highs and our recent interactions with a few coal traders/ experts suggest the possibility of a further downside. This could translate into cost savings of INR 250-300/ton in FY24. Besides, companies are focused on increasing the share of green energy, alternative fuels, logistic optimization, premiumization, etc. which could further aid profitability. We expect the average EBITDA/ton for our coverage universe to rise from <INR 800/ton in FY23 to ~INR 1,200 by FY25E and even higher beyond FY25E. Our FY24-25E EBITDAs are 5%-10% ahead of consensus. We factor <1% realization CAGR over FY24-25E and see an upside risk to our estimates.

Start of an upcycle; many stocks near life-time high: time to BUY or SELL?

In the past upcycle from FY03–10, industry average EBITDA/ton increased from INR 350/ ton to INR 1,050/ton. Even recently, average EBITDA/ton rose from <INR 900/ton in FY19 to INR 1,200/ton in FY21 aided by higher prices and lower costs. With improving demand, ex-South utilization now high at 84%, increasing capex costs (greenfield), receding cost pressure, higher consolidation and relative price inelastic demand, we remain positive on pricing and expect industry average EBITDA/ton to exceed INR 1,200 beyond FY25E. Long-term average price CAGR has been around 4% and we expect a similar trend to continue beyond FY25 driving increasing trend of EBITDA/ton.

Metals: Signs of revival fade; steel prices correct for the 9th consecutive week (MOFSL)

Long steel, which witnessed a pre-monsoon procurement last week, has come under pressure with prices correcting to Oct’21 levels. Ex-Mumbai benchmark primary long steel prices corrected INR900/t to settle at INR53,500/t.

Reduction in domestic demand from the project segment and a fall in global long steel prices due to weak global housing and infrastructure demand have dragged the domestic prices for long steel products.

Project segment customers are under ‘wait and watch’ mode and they are only undertaking ‘need-based buying’, which has plummeted the list prices further by INR1,000/t below the prevailing market prices.

Flat steel prices that had witnessed a slight uptick last week have been relatively flat WoW at INR55,400/t.

The domestic trade-level prices have inched up by INR300-400/t WoW; however, range-bound export prices have kept the overall prices under check. We had anticipated a price correction of INR1,500-2,000/t across the steel sector and the same is now fully priced in.

The arbitrary price gap in exports between India and China is currently around USD15-20/t (~USD100/t in May’23) and hence, we believe a majority of the downside has been factored in with no major price correction likely in the near term.

However, the near-term outlook remains volatile and highly monitorable with multiple mixed signals in the domestic and international markets.

Thursday, June 22, 2023

View from the top

The benchmark Sensex has recorded its new all-time level today, surpassing its previous high level of 63583 recorded in early December 2022. Nifty50 is also few points from its previous highs. In the past six months, since December 2022, both the indices have taken a huge swing of over 10%.

Optically the markets may appear flat for the past six months, as the benchmark indices are almost unchanged; but a deeper dive would indicate that many material shifts have occurred in the market during this period of six months. For example-

· Nifty50 is almost unchanged for the past six months, Nifty Midcap100 has gained over 9% and Nifty Smallcap100 has gained over 7% in this period.

· The sectors that led the markets to new highs in the post Covid period, i.e., IT Services, Pharma, Energy and Metals have actually yielded negative returns in the past six months; while the FMCG sector has been the best performer in this period.

· Nifty PSU Banks that are the best performing sector for the past one year, have actually yielded a negative return for the past six months.

· Despite the turning of rate cycle upwards, popular rate sensitive sectors like Auto and Realty have been amongst the top three performing sectors.

Despite sharp outperformance of broader markets, average market breadth for the past six months has been mostly negative. The months of January-March 2023 in fact witnessed the worst market breadth in over two years.

Another pertinent point to note in this context is that Indian markets have sharply underperformed the most emerging market peers and developed markets in the past six months. Note that in 2022 India was one of the top performing global markets. This is in spite of net foreign flows being positive in the past six months to the tune of Rs500bn (vs Rs1256bn outflows for 2022).

Taking a comprehensive look at the market performance during the past six months, I would draw the following conclusions:

1. From the sharp outperformance of broader markets it is evident that the sentiment of greed is overwhelming the investors’ fears; and signs of irrational exuberance are now conspicuous.

2. Most of the good news (rate and inflation peaking; earnings upgrades; financial stability; etc.) is already well known & exploited; while the fragility in global economy and markets has increased and hence the present risk-reward ratio for traders may be adverse.

3. From a historical relative valuation perspective – Nifty is currently trading at ~4% premium to its 10yr average one year forward PE ratio. The same premium for Nifty Midcap100 is 14%; while Nifty Smallcap100 is trading at ~2% discount to its 10yr average one year forward PE ratio. The discount of smallcap PE ratio to Nifty PE ratio is presently close to 22%, larger than the 10yr average of 16.5%. The sharp outperformance of smallcap may be a consequence of value hunting and irrational exuberance, rather than greed; and the traders may soon return to Nifty as the valuation gap is filled.

In my opinion, therefore, it would make sense to take some money off the table, especially from broader markets and high beta stocks.