I find the following four narratives are presently dominating
the financial market research in India:
(1) Slowing economic
growth
India's economic growth hit a six-year low of 5% in 1QFY20. The
consensus estimates indicate that the growth may further slip even to below 5%
in 2QFY20. Some estimates are forecasting that the 2QFY20 GDP growth, to be
announced next week, may be closer to 4% rather than 5%. The full year growth
number, after accounting for base effect and recovery in 2HFY20, are also
expected to remain closer to 5% rather than 6%.
The slowdown in economic growth is widespread, encompassing all
the segments and sectors of the economy. Agriculture, industry and services
have all slowed down. Investment and consumption demand is multiyear low; and so
are savings, investments and credit growth.
The financial research is adequately capturing the slowdown
since August when 1QFY20 GDP growth numbers were announced. However there are
still differences about the future outlook. A significant section of the market
appears convinced that the slowdown shall bottom out in 2HFY20 and a sustained
recovery may be seen from FY21. On the other hand, many economists still have
doubts about the FY21 recovery. This section appears convinced that road to
recovery is bumpy and to regain a 7% growth trajectory, India would require
many structural reforms over next 2-3yrs.
In my view, based on my interactions with various stakeholders,
any meaningful recovery in the economy may not begin before 2QFY21, and FY21
growth will be closer to 6% rather than 7%. Unless of course the government
changes the denominator by making FY18 as the base years.
(2) Divergence in
economic growth and equity prices
While the economic growth is sliding to multiyear low, the
benchmark equity indices are trading close to all time high levels. This
divergence of economy and equity prices is a popular topic of discussion
amongst various market participants.
I have no view on this issue. Nonetheless I would like to
highlight the following two small points:
(i) The total market
capitalization of stocks listed at NSE was Rs15.2trn in January 2018. Almost
two years later, it was at the same level yesterday.
(ii) The nominal GDP of
India grew 24% during two year period FY17-FY19. The market capitalization of
NSE grew by the same percentage from April 2017 to March 2019.
So the argument that equity prices are outpacing GDP growth may
not be entirely true. It is the skew in the market cap that is perhaps the
cause of intrigue for research analysts.
(3) Fiscal challenges
The consistent decline in household savings and rise in
household debt; poor GST collections; and rise in social sector spending and
urgent need for the fiscal stimulus has made the task of fiscal balancing very
challenging. It is therefore a subject of intense debate how the government
will be able to manage to increase the public spending to stimulate the
economic growth. Large scale disinvestment, release of RBI reserves and perhaps
new avenues of taxation (estate duty etc.) are some of the ideas being
discussed.
In my view, higher effective of taxation seems inevitable, even
if the government is able to execute its ambitious disinvestment program.
However, I am not overly worried about fiscal deficit number, so long the
government is transparent about the accounts (deferred subsidies, withheld
refunds and suppliers' payments, direct borrowing by NHAI and Railways etc. and
revenue earned through book entries, e.g., through PSU buyback, inter se sale
of PSU stakes etc.)
(4) Earnings revival
The 2QFY20 corporate earnings have been mostly in line with
already moderated estimates. The tax cut announced in August did help to some
extent. However, the corporate commentary has remained downbeat and does not
inspire much confidence for earnings revival in the coming quarters. The common
theme therefore is that we may likely see further moderation in the earnings
estimates for FY21 and even FY22.
There are few analysts who believe that earnings revival is
imminent, but majority does not appear to be concurring with that. Earnings
growth is therefore mostly a contrarian idea.
In my view, the earning revival will be very stock specific.
Active investment may therefore be a better idea in FY20.
