With both corporate and banking sector in good shape, we feel India is at the cusp of start of a domestic economic recovery cycle, which can lead to multi-year growth. Despite high energy prices and some slowdown in developed market economies and the Chinese economy, India’s economic growth remains strong as reflected in various indicators such as PMI numbers, electricity consumption, GST collections, property registrations etc.
Recovery from both the first and second covid waves was faster than expected indicating the inherent strengths of the economy. India has enough foreign exchange reserves to ride out the current volatility while ensuring interest rates are aligned to the domestic policy cycle; this gives India a lot of cushion to withstand the pressures it had to confront during the taper tantrum of 2012-13. While geopolitical tensions (Russia – Ukraine conflict, China -Taiwan posturing, etc) could climb, which may heighten international focus on energy security, India’s handling of its energy needs has not given any cause for concern. The current market volatility reinforces our confidence within our investible companies across the portfolio based upon our SQL Investment Framework.
Valuations of equity markets are at slightly above historical averages as high inflation and energy prices, has led to some downgrade in Nifty earnings. We feel that the recent volatility in equity markets would continue for some more time, may be for another three to four months.
As the global macro situations resolves, and as the recovery in the Indian economy deepens, corporates have huge scope for operating leverage, which can drive financial growth in the coming quarters. This will lead the Indian economy to bounce back strongly. We feel the domestic cyclicals, be it consumption oriented or investment oriented, would lead the economic recovery. The key advantage India has over many emerging markets is that we have a strong domestic demand base and our economy is less dependent on exports and global commodity cycles.
Thus domestic cyclicals such as auto and auto ancillaries, consumer durables, real estate and building materials, capital goods and engineering, infrastructure related sectors should do well. Within defensives, pharma and healthcare sector should do better as it comes out of a low growth phase. While the IT sector is facing a threat of global recession post the correction the sector in the past 6 months, valuations are more reasonable now, leading us to have a neutral stance on it. We are also maintaining a neutral position in the financials space.