Do it yourself

(Note: I had last shared my investment outlook and strategy for the financial year FY25 in April 2024. Since then, there have been some changes in circumstances. The global financial system is more stable. Stock markets have done very well. The geopolitical conditions are more stable; and the price situation appears to be in control at both domestic and international levels. The domestic growth continues to surprise on the upside and the external balance is much more stable. The political overhang in the domestic market is over with the general elections. To accommodate these changes, I have made some changes in my outlook and strategy as outlined in April 2024.)

In my view, the stock market outlook in India, in the short term, 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 etc.

(6)        Greed and fear equilibrium

(7)        Perception about the political establishment

The outlook for these seven factors for next 6-9 month is as follows, in my view—

Macroeconomic environment – Positive

My outlook for the likely macroeconomic environment in 2H2024 is as follows:

(a)        Inflation: The consumer inflation may average close to the lower bound of RBI’s tolerance bound of 4% to 6%.

(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.

(c)        Rates: Expect benchmark yields to average in the 6.85% +/- 15bps range. The RBI may stay on ‘pause’ for now. Deposit and lending rates may stabilize around current levels, the liquidity may ease in the forthcoming busy season as government spending accelerates.

(d)        Current Account: Expect current account balance to stay negative as import growth continues to outpace exports. The deficit may average around 1.25% to 1.5% for 2H2024.

(e)        Savings: Household savings may continue to grow at a slower pace as real wage growth remains poor. Aggregate corporate savings though may be higher due to continued deleveraging and rise in free cash flows.

(f)         Investment: The government investment expenditure may sustain at current pace. Private capex may see further recovery in 2H2024. Overall, investment growth may see decent growth.

(g)        Exchange Rate: USDINR may average close to INR83.5 +/- 1 range on a stable current account and higher Fx inflows.

(h)        Growth: The real GDP growth for FY25 may average around 7% despite a slower global economy, on the back of better manufacturing and good monsoon. Overall, macroeconomic outlook is positive.

Global markets - Neutral

The global analysts and economists are nearly unanimous on the growth stability in 2H2024. The likely monetary easing and stable geopolitical conditions may support growth stability. The outlook for USD is neutral as central bankers remain on a corrective path.

Technical Positioning – Negative

Technically, in my view, the benchmark indices may witness a decent correction in 3Q2024 before a sustained rise. At present level thus Nifty offers a negative risk reward.

Technically speaking, Nifty may move in the 20210-24995 range in 2H2024, averaging above 22635. There could be occasional violations of this range. Buying below 22700 will therefore carry a positive risk reward.

Corporate earnings and valuations - Neutral

The earnings growth momentum is peaking after three years of strong show. The visibility of margin improvement is clouded as capacity utilizations are high and companies are initiating expansion plans. Raw material prices are also now ticking up.

The present forward valuations are slightly above long-term averages based on still marginally optimistic earnings forecasts. However, 2H2024 may not witness a material PE derating as macro fundamentals remain strong and visibility of flows is improving.

Alternative return profile - Neutral

Real estate: Real estate prices may not rise materially in 2H2024 as more supply hits the market higher interest rates begin to bite and government incentives are withdrawn gradually.

Gold: Presently, there is no major trigger for the global gold prices to rise significantly in 2H2024. Save for a major geopolitical escalation, gold offers a neutral to marginally negative risk reward.

Cryptocurrencies: In the past couple of 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 2H2024 as well.

Fixed income: The corporate bond yields and deposit rates appear to have stabilized and may see some downward bias in 2H2024. The yield gap is now not material. Overall, in my view, the return profile of alternatives is neutral for equities.

Greed and fear index – Negative

Historically, the most successful, though intuitive, indicator of greed overtaking the fear in the market is sharp outperformance of small cap stocks over large cap stocks. Besides, the volatility index, another gauge of fear, has remained low despite several concerns emerging.

The recent sharp outperformance of smallcap stocks and unsustainable euphoria in few pockets of the markets, indicate that greed is dominating the sentiments. The Greed and Fear balance therefore is negative presently.

Perception about the political establishment - Positive

Strong commitment to promote manufacturing in India; positive outcome of thrust on self-reliance and firmly controlled fiscal balance is keeping markets’ perception about the political establishment positive. However, any significant losses for BJP in the assembly elections scheduled in 4Q2024 may require a review of this position.

Outlook for Indian markets

In view of the positioning of the above seven key factors, my outlook for the market in 2H2024 is as follows:

(a)   NIfty 50 may move in a large range of 20210-24995 during 2H2024. It would be reasonable to expect low single digit return for the 2H2024 on diversified portfolios.

(b)   The outlook is positive for IT Services, Pharma, Specialty & Agro Chemicals, Capital goods, organized retail and consumer durables. Commodities and Financials are neutral.

(c)    Benchmark bond yields may average 6.85% +/- 15bps for the year. Long duration yields may do better in 2H2024.

(d)   USDINR may average close to 83.5+/- 1 and move in the INR82.5-84.5/USD range.

(e)    Residential real estate prices may ease in most metro and large cities.

Some key risks to be monitored for the market in 2H2024

1.    Weather conditions especially poor distribution of monsoon rains.

2.    Worsening geopolitical situation in Europe and Asia.

3.    A recession forecast for FY26.

4.    Sharp rise in credit cost for lenders.

5.    Unusual rise in rural stress.

2H2024: Investment Strategy

Asset allocation

2H2024 appears to be marginally worse than 1H2024 as the market technical have worsened. Accordingly, I am changing my primary investment objective to “low returns and capital preservation”. I believe that the market may continue to offer attractive opportunities to build a good portfolio for the period beyond 2024.

I shall continue to maintain standard allocation in 2H2024; and increase active trading in my equity portfolio to optimize return. My target return for the overall financial asset portfolio for 2H2024 would be 8% annualized.

Equity investment strategy

I would maintain a 60:30:10 mix of large, midcap and smallcap stocks.

(a)   Target 18% annualized appreciation from my trading portfolio;

(b)   Overweight on Chemicals (specialty and Agro Chem), IT Services, Pharma, organized retail and niche consumer stocks.

(c)    Underweight on financials and avoid PSUs.

The first half of the year 2024 has been good for global markets. Despite disappointment on rate cuts, geopolitical concerns, sticky inflation, and political changes in many countries, stocks, precious metals, industrial commodities and crypto made a steady move up with very relatively low volatility.

A notable feature of the global market movement in 1H2024 was the stark underperformance of Asia ex Japan, even though the Japanese equities being the best equity markets amongst the major global markets. Brazil also underperformed despite a decent rally in commodities.

Another notable feature of global markets was the narrow market breadth of US markets. Though the benchmark indices scaled new highs, it was mostly due to parabolic rise in a handful of technology stocks.

At present equity markets appear strong on the back of a resilient demand environment, well anchored inflationary expectations and peak interest rates. Fears of earnings failing to match the stock price rise, escalation in geopolitical tensions, spike in energy prices, uncertainties about the policy direction post the US presidential elections, and erratic weather conditions are some points of concern.

India performance – 1H2024

Indian markets performed very well in the first half of the year 2024. Though Indian equities underperformed the developed markets in line with the global trend, it did very well within the emerging market universe. The key highlights of the India market performance could be listed as follows:

·         The benchmark Nifty50 gained ~10.5% during 1H2024; while the Midcap (+20.7%) and Small Cap (+21%) did much better. Consequently, overall market breadth has been strong.

·         Two third of the market gains came in the month of June 2024, post the elections. This was contrary to the pre-election consensus that BJP failing to secure a majority on its own may result in sharp decline in market.

·         The total market capitalization of NSE is higher by ~21%; more than gains in the benchmark indices – implying that stronger gains have occurred in the section of the market beyond indices.

·         The number sector outperforming the benchmark indices far outnumbers the sector underperforming. The rally was led by Realty, PSUs (mostly power, defense, and railway), Auto, infra and energy. The Capital Goods and Heavy Engineering sector have been the flavor for the period. Particularly, the businesses catering to sectors like defense, railways, and road construction did extremely well. Banks, IT Services and FMCG were notable underperformers.

·         Ship builders were the notable outperformers amongst the individual stocks. No conspicuous sectoral trend was seen for the losers.

·         Institutional flows to the secondary equity markets were positive for five out of the six months. 1H2024 witnessed a total flow of ~INR3559bn, despite FPIs outflows of Rs320bn. The correlation of institutional flows with Nifty returns remained poor (~48%).

·         The rates, currency and yields were stable in 1H2024. Policy rates were unchanged; while money market rates were marginally higher by 15bps. Deposit rates did not see much change while lending rates were higher by 10-15bps.

·         The overall Indian yield curve shifted lower and flattened completely, as the RBI maintained the status quo on policy stance.

·         The economic growth surprised on the higher side with the Indian economy recording a growth of 8.2% for FY24, beating all forecasts materially. Fiscal balance also improved with FY24RE fiscal deficit coming at 5.8% and FY25BE of fiscal deficit at 5.1%.

·         CPI inflation has inched closer to the lower bound of the RBI’s tolerance band of 4%-6% with May’24 CPI inflation number coming at 4.75%.

• Corporate performance has shown resilience in recent quarters, with sales growth recovering, margins improving and RoE rising. Banks reported consistent improvement in the asset quality and profitability.

 Rising participation of household (retail) investors in the Indian stock markets has been a topic of interest for the past couple of years. Most analysts and strategists have highlighted this as a key factor behind a sustained rise in the benchmark indices and low volatility, despite subdued foreign flows. Even the Prime Minister and many senior ministers made it a point in their campaign in the recently concluded general elections.

In particular, a consistent rise in household investments in the mutual funds through systematic investment plans (SIP - a popular method to automatically invest a predetermined amount at predetermined intervals) has been cited as a strong support for the Indian equities.

Most market participants are confident about this support to the Indian equity markets and its positive impact on the valuation, volatility and breadth of the market. I acknowledge the rise in the participation of household investors in equity markets. I am however not very confident about its sustainability and impact on the market performance. I would like to see more scientific evidence of growth in SIP and its impact on markets.

In this regard I find the following data points noteworthy.

·         The share of household savings in the gross national savings has been declining for the past many years. India’s gross savings rate stood at 29.7% of gross net disposable income (GNDI) in 2022-23, with households contributing 60.9% of aggregate savings against a ten year average of 63.7%.

·         The share of net financial savings in total household savings has seen a declining trend in the past decade. It stood at 28.5% in 2022-23, from an average of 39.8 per cent during 2013-2022.

·        Net financial savings of households have declined to 5.3% of GDP (FY23) from an average of 8% during the last decade (2013-2023).

·         The sharp rise in household financial savings during the pandemic (51.7% of total household savings in 2020-21) has been drawn down subsequently, as in many other economies, and shifted towards physical assets.

·        Bank deposits, provident fund and insurance continue to dominate the composition of household savings deployment. Post Pandemic there is some shift towards shares, debentures and mutual funds category, but it does not denote any change in the long term trend.

·        SIP flows have risen in the past few years. The rise has been quite remarkable in the post pandemic period. As per AMFI data, from Rs 43921 crores in FY17, SIP flow rose to Rs199219 crores in FY24.

·        However, if we see on a relative basis (as a percentage of market capitalization), SIP flows have not seen much growth in the post pandemic period. In fact, at the current run rate, FY25 SIP flows as a percentage of market capitalization would be almost the same as FY19.

 Low household credit in India has been a long running theme for investors in India. In the past three decades, I have observed that almost every presentation made by brokers, money managers, investment advisors, lenders, companies catering to discretionary consumption etc., has highlighted this phenomenon. The market participants and companies have consistently emphasized on low household credit as a single most significant factor enhancing the growth potential of, particularly, financial services and discretionary consumption sectors.

However, in the past one year, the narrative seems to have changed somewhat. These days, it is not uncommon to find rising household credit being cited as a key risk to financial stability. The Reserve Bank of India and many analysts have mentioned this factor as a key stress point for the financial stability.

The latest Financial Stability Report released by the RBI notes that “At 40.1 per cent of GDP26, the stock of household debt in India is relatively low when compared to other EMEs, but in relation to GDP per capita, it is comparatively high. With overall household savings declining to 18.4 per cent of GDP in FY:2022-23 from an average of 20.0 per cent of GDP over 2013-2022, and coupled with an increasing trend in financial liabilities, household debt warrants close monitoring from a financial stability perspective.” It further notes, financial liabilities of households have risen in the post-pandemic period, as reflected in the surge in retail loan growth for financing both consumption and investment. Alongside, agricultural and business loans have also grown. Notably, more than two-thirds of borrowers are of prime and above credit quality.

In the post pandemic period, sector wise retail credit growth has remained the strongest. Personal loans have grown almost at 1.5x pace compared to overall credit growth. The growth of unsecured personal loans (including Credit card receivables, Consumer durable loans and Other personal loans) in banks from March 2017 to March 2023 stood at CAGR – 21.0 % outpacing the personal loan growth which exhibited a CAGR of 19% during the same period. Unsecured personal loans account for almost 1/3^rd of the overall bank’s personal loan credit of ~Rs. 41 lakh crores as of March 31, 2023.

Financial inclusion, transformation of consumer behavior, change in lenders’ focus, and enhanced leveraging of technology in lending are some of the reasons cited for the sharp rise in household credit. Household savings hitting almost 50 year low (~5% of GDP) is also one of the reasons for rise in household credit.

As per the recent data released by the RBI regarding sectoral deployment of the credit, the retail credit (constituting 1/3rd of the overall non-food credit) growth stood strong at 17.8% YoY in May’24. Within the Retail segment, credit growth stood strong across Housing (16.9% YoY), Vehicle Loans (17.9% YoY), Loans Against Gold Jewellery (29.7% YoY) and credit card outstanding (26.2% YoY).

It requires an in-depth study to establish whether the rising household credit is sustainable and good for the Indian economy, hence the markets, or a cause of concern.

As I mentioned earlier, this is something which everyone was looking forward to for a long time. Now since it is materializing, should markets be celebrating it or being worried about it!

In my view, dominance of consumers over producers is a natural evolution of growth. Almost every developed and middle-income economy has witnessed this transition in their course of development. India shall be no exception. The concern could be if it is too early for this transition in India, given the high level of poverty, infrastructure inadequacies, energy insecurity, and inadequate legal and regulatory framework.

I am not competent to comment on this. Maybe some experts will conduct deep research to conclude whether the “consumer finance” is already a mature theme in India or still a sun-rise sector. This will determine what kind of valuations should be afforded to the institutions extending unsecured personal loans.

The Reserve Bank of India (RBI) recently released the half yearly Financial Stability Report (FSR). A key highlight of the latest FSR is RBI’s confidence in the resilience and sustainability of growth in the Indian economy.

 EW, notwithstanding

My friend’s daughter who completed her MBA recently, has become an amateur trader, just like many of her peers. She has started self-learning technical analysis while trading in stocks, crypto, gold and currencies. During my visit to their place last weekend, she showed me the following 50 years charts of gold prices in USD and INR terms respectively. She wanted my views on the divergence in chart patterns and likely trends in the near future.

I am not well versed with technical analysis, particularly the Elliot Wave analysis. I am also not sure if she has drawn the wave cycles correctly on the charts. But assuming she has plotted the cycles correctly, prima facie, it appears that in USD terms gold price cycle is close to peak (wave 5 terminating) and is poised for a massive correction of 35-50%; whereas in INR terms the correction (wave 4) could be much lower and the subsequent peak (wave 5) much higher.

I imagined various scenarios and found only one plausible scenario, i.e., gold prices in USD term fall 50% in the next wave; INR depreciates 25% to Rs105/USD in the meantime; and the government of India hikes the duty on gold imports further by 10%. In this case, it is possible that gold prices in INR terms falls 25-30% to mark the wave 4.

I find this scenario frightening. A sharp depreciation in INR accompanied with 25-30% gold prices (which is widely presumed to be safe haven), could hurt several household investors who have aggressively invested in gold and foreign equities in the past year.

Regardless, I am not paying much attention to this analysis. In my view, it is more important to understand why the gold prices surged in 1979-1982; 2006-2010 and 2020-2024.

Between 1979 and 1982, interest rates more than doubled worldwide, dramatically raising the cost of loans. The U.S. dollar exchange rate improved, making the dollars needed to repay loans more expensive. Widespread recession dried up the markets for the exports of developing countries. Real prices for the export commodities that were essential to the developing economies fell to their lowest levels since the Great Depression.

One of the reasons for the widespread recession was sharp rise in crude oil prices during 1970s, that led to huge flows of US Dollars (World’s most preferred currency for trade) towards oil exporting Arab economies which were too small in size to absorb these dollars. These countries channelized these flows (popularly called petrodollars) to western banks which in turn lent it to the developing economies that had just started to industrialized. A stronger dollar made servicing these loans difficult, triggering a cycle of defaults, asset price crash and recession.

The story in 2006-2010 was similar. Unsustainable lending led to sharp rise in asset prices and inflation, followed by collapse of banking system, EM currencies, and commodity prices.

In recent years central banks and governments unleashed unprecedented monetary easing and fiscal support to mitigate the impact of Covid-19 pandemic. The monetary base of developed countries witnessed parabolic rise. Supply chain disruptions caused inflation to spike. Withdrawal of Covid-19 stimuli is now raising the specter of growth slowdown. Geopolitical realignments are threatening the supremacy of USD as world’s reserve currency triggering risk of USD weakening.

Now the question is, do we expect-

·         Interest rates to rise from here

·         USD to strengthen substantially from here, such that USD borrowers face material currency risk

·         Inflation to spike materially from current levels

·         Lending standards to deteriorate putting banking system at risk

·         US growth to materially outperform the emerging economies’ growth

·         World returning to gold standard in foreseeable future.

If not, then there is little empirical support for gold prices to rise materially from the current level; Elliot Wave projections notwithstanding.

Urbanization is intrinsic to development and often serves as a major driver of economic growth. As India reaches tipping point of transitioning from a mostly rural to an urban society, the focus must be on ensuring the best opportunities for economic growth for all sections of the society. — Dr. Rajiv Kumar, Former Vice Chairman, NITI Aayog

In October 2020, the NITI Aayog formed an Advisory Committee on ‘Reforms in Urban Planning Capacity in India’, to find ways to face the multiple challenges being faced in the cities and India’s commitments towards global agendas. After extensive deliberation with domain experts and think tanks, the Committee presented its report in September 2021. The highlights of the report are summarized below.

·         India is the second largest urban system in the world with almost 11% of the total global urban population living in Indian cities. In absolute numbers, the urban population in India is more than highly urbanized countries/regions across the globe. Observing India’s urbanization through Western lens has become a practice . Experience has shown that such objectivity diminishes the motivation and confidence needed to generate innovative solutions for indigenous problems. Indian cities are different from their Western counterparts in terms of culture, demography, lifestyle and so on. Adopting Western practices without tailoring them to suit Indian needs is not advisable.

·         India’s urban story may be lauded globally or suffer irreversible damages in the next 10-15 years depending upon corrective policy measures and actions taken at the beginning of this decade.

·         Over the years, cities have expanded and become burdened by the stresses and strains of unplanned urbanization, the brunt of which is faced by the poor and the marginalised, the biodiversity and the economy.

·         In urban areas, land is confronted with competing uses due to market forces, social necessities, as well as environmental concerns.

·         Issues like lack of availability of serviced land, traffic congestion, pressure on basic infrastructure, extreme air pollution, urban flooding, water scarcity and droughts are not merely a reflection of infrastructural shortcomings in the cities. These issues indicate a deep and substantial lack of adequate urban planning and governance frameworks.

·         Urban planning, which is the foundation for the integrated development of cities, citizens, and the environment, has not received adequate attention. A study conducted by TCPO and NIUA for NITI Aayog indicates that over 12,000 posts for town planners are required in the State town and country planning departments. This is in stark contrast to the present situation. There are fewer than 4000 sanctioned positions for ‘town planners’ in these departments, half of which are lying vacant.

·         A significant proportion of urbanization in the country is unacknowledged and unaddressed. Almost half of the 7933 ‘urban’ settlements are census towns, that is, they continue to be governed as ‘rural’ entities. Small and medium towns face vulnerabilities due to rapid growth and inadequate planning. 65% of the 7933 urban settlements do not have any master plan.

·         In many cities, development control regulations were formulated several decades ago and have been updated arbitrarily without sufficient empirical evidence on their impacts

·         The transfer of the urban planning function from States/UTs to elected urban local governments did not happen as was envisaged through the Constitutional (Seventy-Fourth amendment) Act 1992. Many agencies are involved in urban planning, implementation, infrastructure development at the city as well as State levels. The existing framework has become complex, which often leads to overlapping of functions, lack of accountability and coordination, time delays, resource wastage, etc.

·         Massive capacities for problem-solving, innovation, and ideation are required to address the present and future challenges in the planning and management of cities, towns, villages and their infrastructure. It may not be feasible to create such capacities in the public sector given the size and scale of urbanisation in India. However, the ecosystem of the private sector in urban planning domain has remained under-developed.

·         The country has been producing graduates with degrees such as Bachelor of Planning since more than 3 decades and Master of Planning since early 1950s. However, so far, the urban planning profession has not yet gained a strong and unique identity of its own. As a result, prospective employers, unaware of these courses and skill sets of available graduates, end up hiring professionals from other disciplines to undertake the tasks of planning, thereby creating a negative feedback loop.

The Committee suggested measures to strengthen the three pillars of cumulative urban planning capacity in the country: public sector, education/research sector, and private sector. The suggestions include programmatic intervention for planning of healthy cities, optimum utilization of urban land, ramping up human resources, re-engineering urban governance, involving citizens in urban planning, building local leadership, and enhance participation of private sector.

The committee advised that “The political leadership, decision-makers and planners need to reach a common consensus that a promise to save the environment from the strains of urbanization is a promise of economic growth in the long run. The road to reform may be long. Collaborative, concerted and cooperative efforts are required to strengthen the urban planning capacity of the country. The moment to start is now, if the country has to keep pace with the emerging demands of time.”

The finance minister took cognizance of the report and devoted six paragraphs in the budget speech of February 2022, while presenting the union budget for 2022-23. The FM proposed setting up a high-level committee of urban planners and economists to make recommendations on urban sector policies, capacity building, planning, implementation, and governance. She pledged support to the states for urban capacity building. Five existing academic institutions in different regions were designated as centers of excellence with endowment funds of INR 250 crore each, tasked to develop India-specific knowledge in urban planning and design.

I hope we shall see some results in the current tenure of the NDA government.

Also see Growing like ginger - 1