Global equities had witnessed a strong start to the year continuing strong momentum from December 2019. Rising geopolitical tensions between US and Iran were overshadowed by positive news on US China trade talks with the signing of Phase One trade deal. However, gains were pared on concerns about the impact of the coronavirus on global growth. Oil prices also declined 15.2% month-on-month in January to ~US$55/bbl over concerns of a potential demand shock. Notably, Indian equities were resilient amidst this volatility with expectations from the Union Budget running high in terms of providing a stimulus for growth. FIIs also recorded net inflows of US$1.4bn in Indian equities in January and it marks the fifth consecutive month of net buying of Indian equities by FIIs.
One of the key highlights in January was Amazon’s Smbhav event. It emphasized the fact that India’s aspiration to become a US$5 trillion economy needed active participation from Small-and-Medium sized businesses (SMBs), higher share of working women, and leveraging of technology. Online and offline models will both co-exist. At the event, the CEO of the global tech giant emphasized that improving India-US relations should help to drive India’s growth going forward and CEO of another tech giant had highlighted earlier that India’s growth should accelerate post digitization.
Union Budget 2020 was based on three major themes 1. Aspirational India, 2. Economic Development, and 3. Caring society. Finance Minister re-iterated government’s target to double farm income by 2022. Agriculture credit target has been raised by 25% YoY to Rs 15 trn. Multiple initiatives to strengthen agri infrastructure were laid down – doubling of milk processing capacity by 2025, 2 mn solar pumps, support to additional 45,000 acres of aquaculture, and national cold supply chain for perishables.
The budget’s focus was on attracting more foreign capital into the country via both the equity and debt markets and reviving growth gradually. With India’s GDP growth having likely bottomed out, growth assumptions going forward are reasonably anchored, with nominal GDP forecast to grow by 10% in FY21. Fiscal consolidation has taken a breather, given the push needed for growth. The revised fiscal deficit is estimated at 3.8% of GDP for FY20E (vs. the 3.3% targeted initially) and 3.5% for FY21E. Indian equity markets corrected quite sharply post budget as expectations on all fronts were high but rebounded post that in line with global equities.
View on the Market
Union budget not providing any specific demand side measures to revive growth, a gradual recovery can be expected especially on the back of a low base. There are visible signs of recovery in the rural economy due to rising agricultural products prices in last couple of months. In its latest policy meeting, the RBI highlighted that several high frequency indicators have turned upwards in recent months, pointing to a modest revival in momentum. The RBI also kept its repo rate at 5% and continued to maintain an accommodative stance which should support growth. In addition, RBI has exempted incremental loans for autos, residential housing and loans to Micro, Small and Medium Enterprises (MSME)from CRR. This will help improve credit growth in these sectors.
Earnings growth has likely bottomed out and we should see an uptick from here as the economy recovers gradually. Nifty FY21 earnings growth of 20-23% is expected. At the same time, global market sentiment is shaky on the back of possible slowdown in the global economy due to virus spread in China. From here on, Indian Equity market will more likely be driven by global factors and earnings recovery for the corporate sector. We remain cautiously optimistic. In such an environment, Quality (i.e. high ROE) should continue to outperform despite high valuation. We firmly believe that post recent policy changes, bottoming of economy, stage is set for strong companies becoming stronger and their earnings should surprise bigtime. Valuations of these companies that are looking steep may look reasonable 1-2 years down the line.
It is an opportune time for India to integrate itself into the global supply chain. Even after the Phase One deal, key aspects of the US-China trade war are still to be sorted out. In addition, the coronavirus scare is also leading to a disruption in supply chains as factories in China are being shut down for some time. Given these issues, many companies, especially in the mobile phones, electronics, and consumer durables segments are moving away from single-sourcing and are looking at alternatives to China for their manufacturing set up and sourcing. With the reduction in the effective tax rate for new investments to 17%, India can capitalize on this window of opportunity. In addition, businesses in India can also use eCommerce platforms to export their products globally and this can be a multi-billion-dollar opportunity. Given the ongoing trend away from single-sourcing, companies that can use India’s favourable demographics and leverage technology to make a place for themselves in global supply chains will stand out.
Source: ABSLAMC Research
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