The Russia-Ukraine war has so far claimed thousands of lives, displaced millions, and caused perilous pain, the war has not only limited itself within its geographical boundary but the tremors of it have been felt across the globe as the world faces a severe economic crisis. Leading the pack.
The United States and the United Kingdom were hit the hardest, with inflation reaching decades-high levels. However, the stances of the two countries differ, with the United States tightening at an unprecedented rate, with the market absorbing 300 basis point rate hikes in the last eight months, and more hikes are expected, according to Jerome. H. Powell, Chairman of the Federal Reserve System’s Board of Governors. On the other hand, the British government has announced fiscal stimulus in the form of massive energy subsidies and tax cuts.
The US dollar has risen at a rapid pace over the last 15 months. It soared in value against all major currencies, making it prohibitively expensive. If we look at history such a huge YoY surge in the dollar has resulted in an economic crisis in the past. Further, the Debt to GDP Ratio is highly unfavorable double the level of 2008 around 300%. The Job openings in the US saw a decline amid dampening demand as the economy grapples with the higher interest rate to tame inflation.
The European nations are battling inflation. In recent months, the Bank of England (BOE) has been engaged in monetary tightening, involving raising short-term interest rates as well as selling government bonds. The BOE, which was supposed to liquidate some £800 billion of gilt holdings, but rather decided to buy £65 billion of gilts. It justified its action by saying that the current situation creates a “material risk to UK financial stability.” It would not be that easy for advanced economies to bring inflation under control, as was observed in the past. Once inflation is above 5% in advanced economies, it takes on average 10 years to drop to 2%.
Monthly Economic Update:
- E Direct Tax Collection Surges By 35% To Rs 6.48 Lakh Crore
- Power consumption grows 13.3% to 127.39 billion units in September; 11.65% in H1 FY23
- India’s manufacturing PMI cools down to 55.1 in Sept but is still in expansion territory
- India’s corporate credit quality continues to be strong: CRISIL
- E-commerce saw 35% y-o-y growth in festival sale volumes
- Diwali Sets in Early for Malls, Apparel & Lifestyle Retailers
- ED in top gear, gets a refund of 23,000 crores from banks
- India’s unemployment rate drops to 6.43% in September: CMIE
- Jefferies India Recovery Tracker (JRT), indicates Economic Activities at all-time high levels, currently at 123% of the pre-covid level.
India witnessed a broad-based recovery across leading indicators, as compared to developed markets. India is better placed in terms of PMI. While the latter saw a contraction for India, it is trending high. India’s debt to GDP Ratio has improved since 2008; it is further expected that capital expenditure will improve in the coming years. The Consumer Confidence Index as tracked by RBI shows signs of improvement, and credit card spending has also increased YoY. India’s household debt remains lower than that of other EMs
Economic and credit growth is reviving to double digits, and the bank balance sheet looks healthy with NPA’s at decades low, corporate deleveraging since the beginning of FY19 has resulted in a stronger balance sheet, with companies being in a better position for debt servicing.
The Indian economic condition and equity markets have shown resilience despite heavy global corrections. MSCI India has outperformed MSCI EM both in terms of 5Year and 10Year CAGR. FII’s investing since June 2005 has generated good returns. Further, India’s weightage in the MSCI EM Index is on the rise just beyond China. In terms of valuation, India looks expensive compared to its Asian counterparts on a 1-year basis. When compared to its long-term average, Indian equity is trailing at a marginal premium.
The near-term economic outlook of the equity market will be majorly driven by corporate performance. Although the festive season might uplift sentiment and the market might provide some relief to investors, one cannot ignore the global events, majorly the actions of the central banks and energy prices, which will be an essential determinant in deciding the direction of the market. In the short term, I am bullish on the financial and auto sectors. For the medium term, IT looks good. For mutual fund investors, large-cap appear to be slightly overvalued, and flexicap appears to be a better bet. For the medium-term duration, investors can consider small and midcap.
Writer: Chandan Ghosh
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