Vijay Kumar Gaba: Elections 2024

Wednesday, April 3, 2024

FY25 – Market Outlook and Strategy

In my view, the stock market outlook in India, in the short term of one year, is a function of the following seven factors:

(1) Macroeconomic environment

(2) Global markets and flows

(3) Technical positioning

(4) Corporate earnings and valuations

(5) Return profile and prospects for alternative assets like gold, real estate, fixed income, and cryptocurrencies, etc.

(6) Greed and fear equilibrium

(7) Perception of the political establishment

The outlook for these seven factors for the next twelve months is as follows, in my view—

Macroeconomic environment – Neutral

My outlook for the likely macroeconomic environment in FY25 is as follows:

(a) Inflation: Consumer inflation may average well within the RBI tolerance band of 4% to 6%. However, food inflation may continue to be erratic and cause occasional violations of the upper range.

(b) Fiscal Deficit: The fiscal situation of the central government may remain comfortable as the tax collections remain steady and revenue expenditure is controlled further. I do not expect any significant deterioration in fiscal conditions due to elections scheduled in April-June 2024. No major tax/duty concessions are expected. Any major improvement in fiscal balance would depend on acceleration in asset monetization. The outcome of the general election will be a key factor in this regard. A change in regime could possibly push the FRBM Act targets further by 1-2 years.

(c) Rates: Expect benchmark yields to average in the 7.2% +/- 30bps range. The RBI may remain on pause in the first half and may deliver a 35-50bps cut in the second half depending upon the monsoon and global trend. No major change may be seen in deposit and lending rates as liquidity remains tight and credit demand remains elevated.

(d) Current Account: Expect the current account balance to stay negative for most of the year as import growth continues to outpace exports. The deficit may average around 1.3% to 1.6% for FY25.

(e) Savings: Household savings rate may continue to decline as real wage growth remains poor. Aggregate corporate savings may also decline as capacity utilization increases and corporates embark on capex plans.

(f) Investment: The government investment expenditure may slow down in 1HFY25 due to fiscal constraints and election-related restrictions. Private capex may maintain its 2HFY24 trajectory. Overall, investment growth may see decent growth in FY25.

(g) Exchange Rate: USDINR may average close to INR84 +/- 1 range on a negative current account and elevated inflation.

(h) Growth: The real GDP growth for FY25 may average around 6.25% +/- 50bps despite a slower global economy. A poor monsoon could impact the growth negatively by 50-60bps.

Overall, the macroeconomic outlook is neutral.

Global markets and flows - Neutral

Markets: Global analysts and economists are nearly unanimous on the growth recession in FY25. Most markets are currently pricing some rate cuts and monetary easing to mitigate the impact of economic slowdown. Any disappointment on this count may impact global markets adversely.

Flows: The outlook for the USD is now neutral as the US Fed is not expected to deliver aggressive rate cuts. Flows towards emerging markets may therefore remain down in FY25 as yields in developed markets remain attractive.

Technical Positioning - Neutral

In my view, the benchmark indices may go through a technical correction in 1QFY25. The indices offer a balanced risk-reward at the current level. A correction of 6-8% would make the market attractive again.

Technically speaking, Nifty may move in a wider range of 18475-24995 in FY25, averaging above 19885. Buying below 20650 will carry a positive risk reward.

Corporate earnings and valuations - Neutral

The earnings momentum may slow marginally as banks, energy, and metal earnings growth peaks in FY25. No major acceleration in earnings is expected from FMCG companies. Power, Capital goods, and Pharma are the notable sectors that are expected to deliver a decent delta in earnings. Overall, expect a 15-17% earnings growth.

The visibility of the improved margins sustaining is decent. Higher capacity utilization may warrant capex, hence the beginning of a re-leveraging cycle from FY25. RoE therefore may not improve materially in the next couple of years.

Alternative return profile - Positive

Real estate: Real estate prices rise cycle may peak in FY25 as higher interest rates, withdrawal of tax incentives, and slowdown in demand due to slower employment growth may weigh on demand.

Gold: Gold prices have recently rallied on the back of expectations of rate cuts by central bankers and persistent buying by some large central banks. A stronger USD and resilient growth may halt the recent run-up in gold prices. Save for a major geopolitical escalation, gold offers a neutral to marginally negative risk-reward from the present level.

Cryptocurrencies: In the past few years, Cryptocurrencies have emerged as a notable alternative asset class. Being a new asset class the level of understanding and awareness about this asset class is still low, though the participation has risen exponentially. This combination of low understanding - high participation makes it highly volatile. Nonetheless, its popularity remains high and this trend may continue in FY25 as well.

Fixed income: The corporate bond yields and deposit rates may see some downward bias in FY25, as policy rates peak and begin to descend. The yield gap that favors bonds presently may be sustained for most of FY25.

Overall, in my view, the return profile of alternatives is positive for equities.

Greed and fear index - Negative

Historically, the most successful, though intuitive, indicator of greed overtaking the fear in the stock market is the outperformance of small-cap stocks over large-cap stocks. The volatility index, another gauge of fear, has however inched higher in the recent weeks.

The sharp outperformance of smallcap stocks in FY24 indicates that greed dominates the sentiments presently. This sentiment may change in 2HFY25. The Greed and Fear balance therefore is unfavorable presently.

Perception about the political establishment - Positive

Strong commitment to promote manufacturing in India; the positive outcome of thrust on self-reliance, controlled fiscal balance, and recent election victories are keeping markets’ perception about the political establishment positive. The incumbent is forecasted to perform well in the general elections. This may further strengthen the positive perception.

Outlook for Indian markets

Given the positioning of the above seven key factors, my outlook for the market in FY25 is as follows:

(a) Nifty 50 may move in a large range of 18475-24995 during FY25. It would be reasonable to expect a low double-digit return for the year on diversified equity portfolios.

(b) The outlook is positive for non-bank financials, fossil fuels, construction materials, metals, capital goods, infrastructure, specialized technology, pharma & healthcare, and modern retail. The outlook for automobiles is neutral. FMCG and Chemicals may underperform in 1HFY25.

(c) Benchmark bond yields may average 7.20% +/- 30bps for the year. Shorter end yields may continue to do better in 1HFY24, while longer duration may do better in 2HFY24.

(d) USDINR may average close to 84+/- 1 and move in the 82-86/USD range.

(e) Residential real estate price rise cycle may peak in FY25. Commercial real estate may continue to perform better.

Some key risks to be monitored for the market in FY25

1. El Nino strengthening and adversely impacting monsoon; leading to an unusual rise in rural stress.

2. Material worsening of geopolitical situation in Europe and Asia.

3. A large credit event causing a market freeze.

4. A deeper recession in developed economies that may spill into 2025 as well.

5. Sharp rise in commodity prices due to production/logistic disruptions; restocking; displacement of USD etc.

6. General election results contrary to expectations.

Exploring India – Part 1

Sitting on the banks of river Betwa, overlooking the majestic Orchha palace and Lord Raja Ram’s temple, I had a fascinating talk with two farmers from a nearby village. During the course of our discussion, I learnt that they are real brothers; have a family of 11 people, including grandfather, parents and five children aged 3yr to 13yrs including three sons and two daughters; own less than one acre of land and have been tilling another acre on rent; besides they own one cow. They mostly plant wheat during rabi season and vegetables in kharif and intermediate period. Caste wise they were from Kushwaha community that falls in other backward class (OBC) category. Their families are mostly dependent on government schemes for ration, education of children and healthcare. They live in a semi pucca house constructed five years ago with the help of government subsidy.

They have six bank accounts for their family members, mostly used to receive various benefits from the government and other institutions. They have 2-3 small pieces of gold ornaments each for all three women of the house; two bicycles for the men and one basic mobile phone. They collectively have less than twenty five thousand rupees in cash and bank deposits. They hire tractor for tilling their land; and they borrowed money from an MFI to buy a diesel pump for watering their crops.

The most striking part of the discussion was the effort made by these farmers to convince me that they are not “poor” people. They repeatedly alluded that they are amongst the better off families in their community in the village. Obviously their concept of poverty is very different from what is commonly understood by academicians, economists, analysts and policy makers.

Ompal, elder of the brother, mostly defined poverty philosophically. He believes that anyone who does not take what belongs to others and does not beg cannot be termed as poor. Shivpal, the younger brothers, adding a materialistic dimension, said that they have a roof on their heads, their children never go to sleep hungry, and they are able to take care of their elders – how could they be termed poor. Insofar as availing the benefits of the government schemes meant for the poor is concerned; both appeared convinced that being citizens of this country it is their right to enjoy these benefits. "The government does not oblige us by giving 5kg of cereals and basic education to our kids”, Ompal said, rejecting any suggestion of living on government alms.

To give this discussion a context, the policy makers and agencies use a variety of definitions to identify the poor that need to be helped. The Suresh Tendulkar Committee (2009) pegged the poverty level at consumption per person per day at Rs29 in urban areas and Rs22 in rural areas. Rangrajan Committee (2014) revised the limits higher to Rs1407/person month in urban areas and Rs972/person month in rural areas. This criteria is primarily based on the recommended nutritional requirements of 2,400 calories per person per day for rural areas and 2,100 calories for urban areas.

NITI Aayog uses multidimensional definition of poverty which considers health, education, and standard of living. As per NITI Aayog about 25% of the Indian population is poor. The World Bank counts poverty by measuring headcounts living below US$6.85/day in 2017 purchasing power parity (PPP). By this definition it is estimated that ~84% of the population in India lives in poverty.

Even if we ignore the data presented by private agencies like Oxfam, due to the allegations of political bias, there is no doubt that there exists massive inequality in terms of income, wealth, access to good education & healthcare and growth opportunities in India. For example, as per the latest NITI Aayog data, in Bihar 52% of the state’s population is poor; while Tamil Nadu has just 5% of its population below poverty line. MP has 37% of its population living below the poverty line. In fact the most populated four states – Bihar, UP and MP have the largest number of poor living in poverty.

What I concluded from my discussion with the farmer brothers is as follows:

1. Given the level of poverty, number of poor, and massive inequalities, India should ideally have a strong Communist movement. However, to the contrary, the communist movement has either got constricted to some elite educational institutions or has degenerated into an exploitative and violent Naxal movement in some pockets of central India. Most socialist parties have degenerated into feudal fiefdoms of the leaders.

2. The political system in India does not conform to any popular classification, i.e., socialist, communist, capitalist, monarchy, autocracy etc. We have a unique political system that incorporates some characteristics of socialism, capitalism, feudalism and monarchy. The elected leaders are considered Kings, and the public treasury is considered their personal wealth. They are thanked for cleaning drains, repairing roads and running schools.

3. Awareness about good life, constitutional rights and disguised exploitation amongst people is very low.

I shall be travelling extensively through the country for next one year; would be glad to share more such anecdotes and learnings. Readers’ views and opinions are welcome.

Wednesday, April 3, 2024

FY25 – Market Outlook and Strategy

Wednesday, March 15, 2023

Exploring India – Part 1