Continuing from yesterday…(see In search of Leadership)
As I see it, the current settings of the Indian economy and market are as follows:
Macroeconomic conditions are stable – inflation is under control, fiscal balance is improving, primary deficit is improving faster leaving room for further fiscal stimulus (may be GST rationalization on the top of income tax concessions already announced); terms of trade may improve as more bilateral trade agreements and free trade agreements begin to yield results; monetary policy is growth supportive – liquidity conditions are comfortable, rates cuts have been frontloaded, and current account position is stable.
Financial stability – The health of the financial system is very good. Bank’s balance sheets are stronger than ever with adequate capital and excellent asset quality. Corporates balance sheets are also stronger with accelerated deleveraging in the past 3 years. The government balance sheet is also improving, against the global trend. Settings are thus good for credit and investment cycles.
Growth moderate but stable – The Indian economy is expected to grow at a steady 6.5% annual rate in FY26e. Corporate earnings are expected to grow in the low double digit, accelerating to high teens in FY27. This may not augur well for significant new capacity addition; but nonetheless may keep employment conditions stable.
Consumer demand outlook improving – There are several factors that support an improvement in the domestic consumption demand in the next couple of years. For example, the southwest monsoon that is critical for rural income growth is progressing well. Two, the fiscal stimulus in the form of an effective tax rate cut is beginning to show an impact, as the advance tax collections have shown a decline. Third, the GST rate rationalization on essential household consumption is expected. Fourth, 8th pay commission recommendations are expected to be implemented wef FY26, substantially increasing the disposable income of government and public sector employees. Fifth, the soft commodity disinflation is under progress, making staples more affordable. Sixth, the consumption demand has lagged for the past couple of years, hence providing a favorable base for growth.
From an investor’s viewpoint, these settings, in my view, imply-
· The market should trade with an upward bias for most of the 2HFY26 and FY27.
· The participation should be broader, with most sectors participating.
· Financials, especially consumer finance, may remain in the lead.
· Exports may do selectively well, depending on the contours of the trade deals. A global growth recovery in FY27 may improve broader outlook for exports.
· Domestic consumption growth accelerates. Earnings of the consumer sector that have been on a downward trajectory during the past few quarters, should reverse and become positive. Discretionary consumption (Textile, alcohol, beauty, personal care, healthcare, white goods, etc.) may improve. Up-trading in staples may also be witnessed. Mobile data, budget fashion, food delivery services, quick commerce service, and budget international travel are some areas of consumption with stronger outlook.
· New capacity addition may not be in focus. Capex may be focused on modernization, optimization (debottlenecking) and automation. Power T&D and mining are the two sectors with high capex visibility.
Consumption may be the new leader
From the above summary, it is reasonable to conclude that consumption could be the dominant theme for the next market up move. I find the following consumption ideas worth closely examining:
Consumer finance – NBFCs, private banks
Aspirational consumption – Mobile data, budget fashion, IMFL, and budget international travel, health insurance, preventive healthcare
Consumer services - food delivery, quick commerce
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