Laying BRICS for the future

Early this year BRICS, a bloc of leading emerging economies, announced the induction of five new members, viz., Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates, to its fold. The ten-member bloc has a significant presence in global trade. More specifically, it exercises significant control over the global energy markets, controlling 42% of global oil production and 35% of total oil consumption.

In July 2023, the then President of BRICS, South Africa claimed that over 50 emerging nations have expressed their desire to join the group. Recently, Russia’s Federation Council Committee on International Affairs, stated that BRICS would be expanded further as more than 40 countries are desirous of joining the group.

The cooperation between BRICS members is free, and flexible and extends to a variety of subjects of common interest amongst members. The members and other countries desirous of joining the group, view BRICS as an alternative to global bodies viewed as dominated by the traditional Western powers and hope membership will unlock benefits including development finance, and increased trade and investment.

Defining the vision of BRICS, President Putin said, “BRICS is attracting an ever increasing number of supporters and like-minded countries that share its underlying principles such as sovereign equality, openness, consensus, aspiration to form a multi-polar international order and a fair global financial and trading system.

The expansion and strengthening of BRICS could, therefore, be interpreted from different perspectives. From the geopolitical perspective, it could be seen as a vote of no-confidence in the extant global order, dominated by Western developed countries (especially the US), by the emerging economies. A larger BRICS could undermine the dominance of NATO, the UN, and even the IMF.

From India’s perspective, it could act as a strong resistance to any material escalation between India and China. We have already seen the traditional rivals Iran and Saudi Arabia bridging the differences and coming together on the Palestine issue. We have also witnessed ineffectiveness of the NATO sanctions against Russia over the Ukraine invasion issue. BRICS and other developing countries have increased their trade with Russia materially in the past couple of years, as reflected in a larger current account surplus for Russia.

From an economic perspective, a larger and stronger BRICS could play a significant role in determining the terms of global trade. Its present and prospective members would control a significant proportion of the global human, mineral, and manufacturing resources. Besides, helping in securing better terms of trade, ensuring energy security is seen as another key advantage of a stronger and larger BRICS.

From a financial perspective, post global financial crisis, a large number of developing countries have reported a slowdown in financial aid from developing countries. The conditions appear to have deteriorated further post the Covid-19 pandemic. A deeper and wider cooperation between the enlarged BRICS grouping, the humanitarian aid to the developing nations could be restored.

From a monetary perspective, there is an intense debate about limiting the role of USD in global trade. A BRICS agreement on adopting a common independent currency or increasing the bilateral trade in local currencies could help in achieving this objective. There is strong evidence of a material rise in yen trade between Saudi Arabia-China and Russia and China. India has also made some advances in promoting INR trade with traditional trade partners like UAE and Russia. We might see more developments on this front in the next couple of decades.

These may be the early days to term BRICS as a foundation for change in the post-USSR unipolar global order to a multipolar world order that shall facilitate much-delayed reforms in the global institutions like the UN and IMF etc. Nonetheless, the developments are encouraging and offer hope.

Buffetology vs TikTok

In the pre-finfluencer era, we used to have gods in the financial markets. Those gods would make an occasional public appearance and talk about their views on markets and investment strategies. The market participant would listen to these gods with rapt attention and follow them religiously. All those Buffets, Mungers, Rogers, Finks, Woods, Jhunjhunwalas, Damanis, et. al. were revered names. Then TikTok, Instagram, and X (formerly Twitter) happened. Financial experts, economists, monetary theorists, and technical gurus mushroomed at the rate of 100 per hour.

Everyone who has traded stocks or crypto for three months is now an expert. They not only try to influence other investors/traders by giving unsolicited advice and recommendations; but also get influenced by the advice/recommendations of others who may not be any better than them. Sometimes it appears that there are more experts in the market than the actual number of investors and traders. Unfortunately, this is the situation worldwide.

Misallocation of capital and unwarranted and avoidable losses are some natural consequences of this phenomenon. However, a more significant consequence is a diminution of traditional correlations.

A multitude of market influencers is driven by individual positioning as against a conceptual understanding of finance and economics. There are no dominating views in the markets. Each influencer is influencing multiple traders and also getting influenced by multiple other influencers. Since more positions are driven by intuitions rather than fundamentals, the divergence between market prices and fair values is wider, and lasting much longer.

For example, consider the following:

Gold and bonds are trading in opposite directions. Gold, traditionally considered a hedge against a drop in real rates, started firming up in 2022. However, now that 2024 rate cuts are getting dropped from foreca500sts, gold has given its best 2-month performance in decades.

This divergence of gold from real rates, against the historical trend, is being explained from a variety of angles. Some believe that a US sovereign downgrade may be imminent. Others explain this as a move away from USD in a worsening geopolitical scenario. However, the equity positioning and tech valuations do not corroborate any of these views.

Similarly, equities and rate expectations are also diverging against the historical trend. In the past six months, S&P500 has rallied 25% despite hopes of 2024 rate cuts fading fast.

Recently, Jamie Dimon, CEO of JPMorgan, was quoted as saying, “We are prepared for a very broad range of interest rates, from 2% to 8% or even more”. Larry Summers, Former Treasury Secretary, a very reputable name in financial markets also said, “You have to take seriously the possibility that the next rate move will be upwards rather than downwards”. Michelle Bowman, FED Governor, also said, “I continue to see the risk that at a future meeting, we may need to increase the policy rate further should progress on inflation stall or even reverse."

But no one appears to be listening to these experts. Professional TikTokers are getting more attention than them. I will not be surprised if the people who trade on their advice learn some basic investing lessons paying a heavy price.

I am not worried about US public debt

 The issue of high and rising US public debt is a subject matter of public discussion in Indian streets. Using a common Dalal Street phrase I can say that every paanwalla, taxi driver, and barber is now discussing how unsustainable US public debt is. For example, listen to this boy .

From top economists, analysts, and global strategists to a common man on the street, all are worried about an imminent US default and its impact on the global financial system, especially the developing and underdeveloped countries.

Currently, the US public debt is close to US$35trn (Appx 125% of annual GDP) and is projected to double in the next eight years. The current US government's annual interest payments are more than US$1trn (Appx 20% of annual federal revenue; 14% of annual federal spending and 4% of GDP). The average interest rate on the entire debt is less than 3% p.a.

As of June 2023, 43% of this debt was owned by the Federal Reserve System and State and Local Governments. 32% of the debt was owned by various domestic institutions (MF, Insurance, Pension, and Depositories, etc.) The balance 26% was owned by other institutions including foreign governments. Almost the entire debt is denominated in USD.

This debt level is a matter of concern but does not prima facie appear to be at a disaster level. The worrisome part is that about one-third of US public debt is short-term (12 months or less maturity). However, considering that a large part of this debt could be owned by the government institution and the Federal Reserve System, refinancing of this debt should not pose a significant problem. In my view, US debt could be sustained with 3-4% inflation, 20% USD devaluation, 5% revenue growth (higher taxes), and rationalization/reimbursement of various war funding expenses, this debt could be sustained, reduced, and serviced. It is of course going to be hard for US savers and middle classes for a decade or so. USD losing its reserve currency status may be collateral damage.

For context, as per the interim budget for FY25, India’s central government debt was ~Rs172trn as of 31^st March 2024. This is approximately 58% of GDP. 3% of this debt is held by foreign entities. However, using the standard IMF definition India’s Debt to GDP ratio is ~82%. Since most of this debt is INR-denominated and RBI is holding a strong US$650bn forex chest, servicing is not an issue.

However, as per FY24BE, interest expense would account for 25% of total government expenditure, after material cuts in subsidies. For a developing economy, this interest expense to government revenue expenditure is considered worrisome, as it hampers investments, keeps fiscal deficit high, makes interest rate cuts difficult, leads to lower social expenditure affecting the quality of life, and hampers further market borrowing capability of the government.

The small point is that investors in Indian securities should be more concerned about seemingly unsustainable public debt in India rather than the high debt levels of developed countries.

As a small investor with zero risk appetite, I keep a cushion for lower subsidies, late payments of government dues, higher effective taxes, small probability of higher rates in my investment strategy.

Act before it is too late

India’s real GDP is expected to grow ~7.8% in the current year FY24. At this rate, India’s growth would be the fastest among all major world economies. Indubitably, it is a matter of comfort for all Indians. Investors are celebrating as markets are buoyant and asset prices are rising.

However, if we juxtapose the statistics of GDP growth and infrastructure development with the following, we get a different picture.

·         India carries the highest number of people suffering from tuberculosis (TB). In the year 2022 alone, about 2.8 million new cases of TB were registered in India. Out of these 342000 reportedly died due to the disease. India is popularly termed as the TB capital of the world. (Read here)

·         India has over 100 million confirmed diabetes patients and 136 million pre-diabetics. the number of diabetic cases has increased by 44 percent during 2019-2023, from 70 million affected people in 2019. (Read here)

·         Some reports have stated that one-third of the Indian population may be pre-diabetic, two-thirds population may be pre-hypertensive, and one-tenth population may be suffering from mental disorders like depression. India is also known as the diabetes capital of the world.

·         A recent report has also declared India as the cancer capital of the world, with the country experiencing the fastest increase in cancer cases. The most common cancers in order of occurrence in India are breast cancer, cervix cancer, and ovarian cancer among women. For men, the most common cases are instances of lung cancer, mouth cancer, and prostate cancer.

In 2020 India had 1.39 million cases of cancer. This number is expected to grow to 1.57 million in 2025. The median age for cancer diagnosis is 52 years for breast cancer and 59 years for lung cancer. 30% of colon cancer patients are less than 50 years of age.

·         Cardiovascular diseases (CVD) have become an epidemic in India. At least 27% of deaths in India are caused by CVDs. (Read here)

·         The present total fertility rate (TFR) of India is estimated to be 1.91 (year 2021). It is well below the universally accepted replacement rate of 2.1; implying that India’s population is likely to peak in the next two decades and begin to decline. TFR is projected to decline to 1.29 by 2050 and slip further to 1.04 by 2100. (Read here)

·         As per the India Skill Report 2021 the employability quotient of Indian graduates is disappointing. Among the formally educated, employability is less than 50% across the board. About 47% of B Tech, 47% of MBA, 43% of BA, 40% of B Com, and 30% of BSc graduates had employable skills. Only 22% of MCA degree holders could be considered employable.

To me, this implies that India is losing its demographic dividend very fast and ahead of full realization. We are racing fast to become an old, depressed, and sick nation by 2050, instead of a young, vibrant, and progressive nation. There is something wrong with our development model. Celebrating GDP statistics and driving into complacency may not be a good idea. The urgent need for all stakeholders is to sit together and make radical corrections to the extant development model. For now, I do not see any hint of this in any of the election manifestos released so far.

A man and an elephant

For many weeks, global markets have been behaving in a very desynchronized manner. Non-congruence is conspicuous even in the behavior of the same investor/trader operating in different market segments, e.g., equities, bonds, commodities, currencies, cryptocurrencies, etc.

For example, until a month ago an investor with a balanced 50:50 debt-equity asset allocation invested in bonds as if a soft landing was imminent leading to a series of policy rate cuts over the 12-15 months. The same investor invested in equities believing that earnings growth would surpass the estimates and stocks of top technology companies would continue with their dream run. The investor was content investing in USD assets assuming green greenback would strengthen and at the same time he was buying bitcoins expecting the demise of the extant monetary system by independent crypto or digital currencies.

Last week in the US, equities reached their all-time high levels as if all is well in political, geopolitical, climate, economic, and financial spheres. It felt that the Fed was about to begin a sharp rate cycle, earnings growth had rebounded, Sino-US relations had normalized, the Gaza ceasefire had been announced, and El Nino had ended. However, across the street, the bond market was selling off as if prices were going out of control forcing the Fed to push the rate cuts to 2025. Back street, the bullion market announced that a recession was imminent. Across the Ocean, crude prices were rising as if a war was imminent with Iran threatening to escalate. In dark streets, crypto traders were laughing at conventional investors/traders rushing to bullion markets to hedge against recessionary weakness in USD.

Back home, last week equity indices reached their all-time high. Nifty Small Cap 100 gained over 7%. Commodity stocks rallied as if a bullish commodities cycle was imminent. Ignoring RBI's concerns over prices and credit, bond prices corrected only marginally. No one bothered to care about political manifestoes which are promising fiscal profligacy of gigantic proportion. USDINR appreciated marginally ruling out any pressure on the current account and balance of payment due to the sharp spike in energy & gold prices (two major imports of India) and FPI flow reversal due to the narrowing yield differential between India and developed market yields. People are also rushing to buy Silver (up 10% last week) to make some quick gains.

One of the largest asset management companies is running equities weight close to the lowest permissible in their balanced fund. It has also restricted flows to their smallcap fund. The top fund manager at this AMC is one of the most respectable names in the industry. Considering that the Smallcap index was up 7% last week against the 0.8% rise in Nifty, it seems, no one is listening to his sane advice.

We have all heard the story of an elephant and six blind men. It goes like this.

Once upon a time, there lived six blind men in a village. One day the villagers told them, "Hey, there is an elephant in the village today."

They had no idea what an elephant is. They decided, "Even though we would not be able to see it, let us go and feel it anyway." All of them went where the elephant was. Every one of them touched the elephant.

"Hey, the elephant is a pillar," said the first man who touched his leg.

"Oh, no! it is like a rope," said the second man who touched the tail.

"Oh, no! it is like a thick branch of a tree," said the third man who touched the trunk of the elephant.

"It is like a big hand fan" said the fourth man who touched the ear of the elephant.

"It is like a huge wall," said the fifth man who touched the belly of the elephant.

"It is like a solid pipe," Said the sixth man who touched the elephant's tusk.

They began to argue about the elephant and every one of them insisted that he was right. A wise man was passing by and he saw this. He stopped and asked them, "What is the matter?" They said, "We cannot agree on what the elephant is like." Each one of them told what he thought the elephant was like. The wise man calmly explained to them, "All of you are right. The reason every one of you is telling it differently is because each one of you touched a different part of the elephant. So, the elephant has all those features that you all said."

"Oh!" everyone said. There was no more fight. They felt happy that they were all right.

The story's moral is that there may be some truth to what someone says. Sometimes we can see that truth and sometimes not because they may have different perspectives which we may not agree to.

But I am witnessing a different phenomenon. No six blindfolded men are feeling different parts of an elephant this time. It is only one person who sees different parts of an elephant with open eyes and is not able to tell that it is an elephant.

In defense of MNCs

The strict stand of the Supreme Court of India in the case of misleading advertisements and false claims by the Patanjali Ayurveda is important. A clear verdict in this case and guidance to the State for framing & enforcing stricter norms for alternative treatment methods, especially for mental and sexual health problems, is long overdue. Any person who has traveled long distances in Indian trains and roadways buses must be aware of how misleading advertisements and claims are used by unqualified, and often fraudulent, medical and spiritual (for lack of better word) practitioners to swindle the gullible common people. There are millions of cases of these practitioners causing irreparable, and often fatal, harm to unsuspecting patients.

The Supreme Court’s verdict, in this case, would be a timely reminder to the State and the people about fundamental duties prescribed under the Constitution (Article 51-A, inserted through the 42^nd Amendment), especially the duty to “Develop scientific temper, humanism and the spirit of inquiry and reform.” (Article 51A(h))

Considering the present state of affairs, creating awareness about developing a scientific temper; showing empathy towards fellow citizens; examining the information for fake & manipulative content; and implementing social reforms are critical for sustainability and growth.

I have been frequently writing about the misinformation campaign being run by several self-styled spiritual gurus, against the multinational corporations operating in India. I may reiterate what I have been saying in the defense of MNCs.

In the defense of MNCs

I am not a regular TV watcher. I have also reduced my social media interactions by almost 80% in the recent past. For my socioeconomic views and investment strategy, I am therefore completely reliant on what I see with my own eyes and feel with the weight of my wallet.

I had the opportunity to hear the promoters of Patanjali Ayurveda. They have always been critical of all MNC players in Indian markets and often claimed to be working actively to annihilate them. One of the promoters claimed that their commercial venture is a torchbearer of the larger Swadeshi (self-reliance) movement taking place in India. Once, he categorically stated his endeavor shall chase away all MNCs, like HUL, P&G, Colgate, etc.,  who have plundered wealth from Indian consumers for over a century. He alleged that these companies are plundering money from Indian consumers and taking it abroad to benefit their parent organizations.

Surprisingly, the government (which appears keen on MNCs investing in India by making India a better, easier, and safer place to invest and do business); various business and industry associations (who are duty bound to protect the interest of their members and ensure a level playing field); and a variety of other regulators and administrators, have made any murmur of concern over this.

Ostensibly, Patanjali marketing campaigns are overwhelmingly based on (a) an emotional appeal on grounds of patriotism and Swadeshi; and (b) materially better quality of Patanjali products as compared to the products of MNCs.

Insofar as the quality of products and use of "dangerous" chemicals etc. is concerned. I am not competent to comment on this subject. However, I do have an observation to share on the issue of plundering money from Indian consumers.

In my view, the owners of a corporate entity can get money from the entity only in two forms - dividends and return of capital. Return of capital in a normal course occurs only if the business is wound up (ignore buybacks etc. for a while).

·         An analysis of listed companies having 50% or higher foreign holdings suggests that foreigners own more shares in the companies popularly perceived to be "Indian" rather than those condemned as MNCs.

·         173 companies having over 50% foreign holding paid a total of Rs769bn as dividends for FY23. Out of this Rs551bn was paid to the foreign shareholders while Rs218bn was [aid to the Indian shareholders. These companies paid Rs825bn as salary and wages.

·         The top 10 companies popularly perceived to be MNCs paid a total of Rs203bn as dividends to foreign shareholders in FY23; whereas the top 10 companies popularly perceived to be Indian paid a dividend of Rs443bn to foreigners.

·         Against a dividend remittance of Rs203bn, top ten MNCs incurred Rs646bn as employee cost, which is paid predominantly to Indians. Besides, these MNCs sourced most of their raw material from India, got their products manufactured by Indian contractors (mostly SMEs), and created significant business opportunities for the people engaged in their local supply chain. Maruti alone would have supported hundreds of SMEs to build sizable businesses, employing millions.

·        
Many of these MNCs have put India on the global roadmap, in terms of quality of products, technology, innovation, and even export markets. For example, Maruti Suzuki has helped thousands of ancillary units (mostly in the SME space) to grow and register their presence in the global arena. HUL has cultivated many managers who have grown to become global leaders.

One must be alarmed if someone like Patanjali promoters express their intention to annihilate these MNCs. The Swadeshi champions may also note that if these companies decide to wind up their businesses, sell their assets, and take the money home, the outflow will be much larger than what would possibly they remit as dividends in the next 50 years. The consequent job losses would be catastrophic.

It would therefore be only appropriate that the State takes the lead from the Supreme Court verdict in the Patanjali case and explicitly announces its stance on this issue. 

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.

Also read:

FY24 – Resilient growth and positive sentiments

FY24 – Resilient growth and positive sentiments

FY23 was mostly a year of normalization. After two years of disruptions, uncertainty, and volatility, both the markets and the economy regained a semblance of normalcy in terms of the level of activity, trajectory of growth, direction, and future outlook.

Building on the momentum regained in FY23, the Indian economy and the markets made a steady move forward in the financial year FY24. The resilience of growth has been surprising, given the tighter money conditions and challenging external environment.

The global economy was also stable despite geopolitical and climate challenges. Global markets accordingly performed well. The sentiments remained mostly positive and supportive of risk.

The following are some of the highlights of the performance during FY24.

Equity Markets

Indian equity market was amongst the best-performing global markets. The benchmark Nifty yielded a return of ~29% (27% in USD terms), which was in line with the US markets (S&P500 +28%), but much higher than Europe (Stoxx600 +12%; DAX +18%).

Asian markets were mixed. Japanese equities were the top global performers (Nikkei255 +44%); South Korea (KOSPI +17%) did reasonably well; while China (Shanghai Composite -7%), Singapore (-14%) and Hong Kong (Hang Seng -19%) ended the year with major losses.

Broader markets at the center stage

The primary action was away from the benchmark Nifty. Broader markets sharply outperformed the benchmark in one of their best years in the past decade. Nifty Smallcap 100 (+70%) and Nifty Midcap 100 (+60%) led the market gains.

The overall market cap was higher by 50% yoy against Nifty50 gaining 29% (81% of total market cap) and Nifty500 gaining 39% (91% of total market cap). Some part of the gap could be explained by new listings, but most of this is attributable to the massive outperformance of smallcap stocks.

Sector-wise, Realty, PSU Banks, Auto, Energy, Infra, Pharma and Metal stocks were top outperformers. Financials (ex PSU Banks), FMCG, IT Services were notable underperformers. Micro-sector-wise, renewable energy stocks were outstanding while chemicals were the worst performers.

Nifty consistent performer; broader markets more volatile

The benchmark Nifty50 yielded positive month-on-month returns for nine out of twelve months in FY24. However, the market breadth was negative in five out of twelve months implying much higher volatility in the broader markets.

Institutional flows positive, Nifty-Flow correlation breaks in 4QFY24

Institutional flows were materially positive for FY24. Net domestic and foreign flows in the secondary equity market amounted to Rs3609bn. Foreign Portfolio Investors (FPIs) were net buyers of Rs1510bn while domestic institutions pumped in Rs2099bn. FPIs were net sellers in four out of twelve months. The nifty-institutional flow correlation however completely broke down in 4QFY24 when Nifty gained less than 3% despite Rs1042bn of net institutional flows.

Debt and Currency Markets

Indian debt and currency markets were mostly stable during FY24, showing little volatility. RBI did not make any changes to the policy rates.

The benchmark 10-year treasury bond yields eased to 7.05% from 7.3% a year earlier. USDINR weakened 1.8% to 83.37 from 81.87 a year earlier. Lending and term deposit rates were higher by up to 50bps. The yield curve shifted lower and flattened completely.

The RBI continued with its “withdrawal of accommodation” policy stance. The liquidity position therefore remained tight for most of the year. The credit growth outstripped the deposit growth. Overnight and call money rates were accordingly higher by 70-90bps.

Economic conditions

Overall GDP growth was consistent and strong for the first three-quarters of FY24. Beating all forecasts and consensus estimates, FY24 GDP is poised to show a growth of over 7% yoy. FY25 GDP growth estimates have accordingly been upgraded.

·         CPI Inflation mostly remained within the RBI’s tolerance band of 4-6% (except for a short spike in 1QFY24). Core inflation eased below 4% in 4QFY24.

·         Real rates have mostly remained in positive territory during FY24.

·         Private consumption, household savings, and government consumption expenditure were some of the distinct areas of slowdown.

·         Project awarding activity witnessed a marked slowdown in 2HFY24.

·         Rural markets gave mixed signals of demand recovery. For example, farm tractor sales declined again in 2HFY24, while 2w-3w sales staged some recovery. FMCG companies’ commentary remained mostly cautious about the consumption demand recovery in rural areas.

·         External conditions were broadly good. The current account balance was manageable at 1.2% of GDP during 9MFY24, supported mostly by services and remittances. Merchandise trade balance remained negative.

·         Electronics (6.5% of total exports) and Pharmaceutical (6.3% of total exports) registered good growth, while traditional petroleum products, gems and jewelry, and textiles recorded materially negative growth during 9MFY24.

·         Net FDI flows continued to decline for the third consecutive year.

Commodities

FY24 was a mixed year for commodities. Precious metals (Gold +15%) and crude oil (Brent 10%) recorded decent gains, while industrial metals (Nickel -30%, Zinc -17%, Steel -19%), natural gas (-21%), coal (-28%), and agri commodities (Wheat -19%, Soy -21%) ended the year with strong losses.

Crypto shine

Cryptocurrencies like Bitcoin staged a massive recovery during FY24, ending the year at all-time high levels. The newest asset category gained a wider acceptance during the year from market participants and regulators.

End the pretense – choose between Democracy and Monarchy

A new study by the World Inequality Lab highlighted one of the most obvious facts, i.e., the income and wealth inequalities in India have been rising and are now worse than the colonial period. The study highlights that “Inequality declined post-independence till the early 1980s, after which it began rising and has skyrocketed since the early 2000s. Trends of top income and wealth shares track each other over the entire period of the study. Between 2014-15 and 2022-23, the rise of top-end inequality has been particularly pronounced in terms of wealth concentration. By 2022-23, the top 1% income and wealth shares (22.6% and 40.1%) are at their highest historical levels and India’s top 1% income share is among the very highest in the world, higher than even South Africa, Brazil and the US.”

The study suggests that “A restructuring of the tax code to account for both income and wealth, and broad-based public investments in health, education and nutrition are needed to enable the average Indian, and not just the elites, to meaningfully benefit from the ongoing wave of globalization. Besides serving as a tool to fight inequality, a “super tax” of 2% on the net wealth of the 167 wealthiest families in 2022-23 would yield 0.5% of national income in revenues and create valuable fiscal space to facilitate such investments.”

 

This is probably not a good time to publish such reports which highlight any deficiencies in India's governance model. The opposition parties use these reports as a tool to attack the government. The ruling party rejects the finding as malicious propaganda to malign the image of the country and its government - everyone misses the point, i.e., there may be some serious flaws in the socio-economic development model used in the past five decades by various governments. These flaws, on the one hand, may have resulted in a widening of socioeconomic disparities, and on the other hand, might have constricted the growth and development of the country.

 

Bloomberg columnist Andy Mukherjee opined “‘Billionaire Raj’ Is Pushing India Toward Autocracy”. A known critic of the establishment, Mukherjee extorted the voters to ask questions. He wrote, “The super-rich have opened their wallets to Modi, and income inequality has soared over the past decade. With an election coming, ordinary voters need to ask, ‘What’s in it for us?’”

My view is that India never had democracy. We have always been a feudal society. In the post-independence era, democracy has mostly been a tool to capture feudal power. Since the late 1970s most parties have used the façade of socialism to become feudal (e.g., BSP, SP, RJD, and DMK, TDP, TMC, BRS, AAP, etc.) BJP also adopted Gandhian Socialism as its guiding philosophy briefly. The longest-ruling Congress party had turned feudal in the late 1960s. Parties like SAD, PDP, NC, NCP, YSRCP, etc., have been blatantly feudal ab initio.

We, the people of India, have always celebrated the feudal powers of our leaders. The poor and oppressed admired and vehemently defended, for example, the diamond jewelry of Mayawati, the Luxury cars of Mulayam and Lalu, the riches of the Badal, Jayalalitha & Karunanidhi clan, and the variety of designer attires of our prime minister.

The unemployed, ill, starving, and oppressed take pride in some Indians making a place in the Forbes list of global rich, spending billions on their children's weddings, and visiting temples to ask for more wealth from God.

They also feel empowered in queueing up for hours to shower rose petals on their leaders’ retinue of luxury cars in meaningless pretentious roadshows.

They celebrate when patriarchs of the parties they support, “nominate” their favorites to public offices. No one wonders that they have been given no right to elect their representatives or leaders. Feudal parties impose people of their choice as the parliament, assembly, and local body candidates on them. The set of people who would be PM, CM, Mayor, minister, governor, etc., is pre-determined by patriarchs irrespective of who is elected or defeated in the elections. Nobody is interested in discussing or following any ideologies.

The people who suffer the most do not seek accountability from their leaders. On the contrary, the random guys daring to ask questions are termed seditious by the same people. No one dares to challenge the feudal lords.

The debate should therefore be on the core issue – “Whether we should end the pretense and choose between a true representative democracy or a proper Monarchy?”

My vote is for a true democracy, where people choose their representatives (not merely vote for the candidates imposed on them by some random guys sitting in Delhi party office).