Everyone thought that the pandemic would devastate global markets. But it is the post-Covid period that is proving to be dangerous, with sharp interest rate hikes around the world, a prolonged war in Europe and Xi's ‘zero-covid’ policy in China. As the overall outlook darkens, India may also face roadblocks.
In this week’s Analyticks:
- Storm on the horizon?: India feels the heat of a worsening global economy
- Screener: Stocks which saw growth in Q2FY23, and where analysts predict strong FY23
Let’s get into it.
Can the Indian economy steer through a worsening global environment?
The going was good for India until August 2022. Foreign institutional investors had finally become net buyers in Indian equities in July and August, after selling stocks for nine consecutive months. India offered shelter in the global economic storm.
Numbers and facts supported the idea that India was recovering rapidly. The country’s retail inflation was lower than that of advanced economies like the US and Europe. Economic activity was rising, GDP growth was up and India was projected to be the fastest growing economy both this year and the next. In another major relief, crude oil prices slipped below $95/bbl in August.
There were theories explaining India's outperformance: that the Indian economy was 'insulated' from the world due to domestic growth, and had ‘decoupled’ from the US market. The Nifty 50 index rode high and gained over 12% between June end and August end.
Cut to September 2022: the US Federal Reserve did another big interest rate hike of 75 bps. And the ‘insulated economy’ story began to crack.
Rupee hits fresh lows against dollar, retail inflation hits a 5-month high
Last week, a statement by finance minister Nirmala Sitharaman became the talk of the town. According to her, the problem is not the falling rupee, but the strengthening dollar. Prima facie, this statement seems correct, as the greenback has gained strength against most currencies, including the euro, pound and yen.
The dollar’s rising strength has been driven by sharp interest rate hikes by the US Federal Reserve. Foreign investors are flocking back to the ultimate safe haven that are US treasuries, causing renewed capital flight from India. It's a reminder of what the US Treasury Secretary John Connally said to leaders of other countries in 1971: "The dollar is our currency, but it's your problem".
The rupee could have fallen much further. But the RBI has spent over $100 billion from India’s forex reserves since January 2022 to rescue the rupee. The apex bank sold dollars in the open market to increase dollar supply, and prevent it from rising further. So while Sitharaman claims that our currency has fared better than others against the dollar, that's because the RBI put a big cushion under the rupee.
A weak rupee has led to India importing additional inflation, as dollar-priced imports become more expensive. Some domestic factors have also worked against us. Monsoons were uneven in India with major agrarian states like UP and Bihar reporting a rainfall deficit. This caused food price inflation to soar to 8.6% and overall consumer price inflation to hit a 5-month high in September 2022.
The silver lining here is that India’s retail inflation still trends lower than that of US and Europe. However, US inflation levels have relaxed from their 40-year highs in June 2022. The aggressive rate hikes undertaken by the US Fed tamed inflation to some extent. But European inflation is proving to be sticky, with energy shortages driving higher gas prices.
India's economic activity slows down, China sees some GDP recovery
In September, India saw its composite Purchasing Manager's Index, which tracks business health, fall to a five-month low due to a sharp drop in services activity growth.
Growth in manufacturing activity also softened in the previous month. The Index of Industrial Production, a measure of India’s industrial output, fell by nearly 1% on a YoY basis in August 2022. This was due to a slowdown in manufacturing and mining activity. Manufacturing activity was pulled down by a fall in production of textiles, apparels, pharmaceuticals and electrical equipment.
US and Europe numbers are even weaker - their PMI levels have contracted for the fourth consecutive month now. High levels of inflation and rise in borrowing costs have impacted their domestic demand.
China however, finally witnessed a jump in economic activity in June after three months of decline thanks to Xi Jinping's zero-Covid policy. Although growth is still slow, it has finally turned positive - China reported a GDP growth of 3.9% in Q3-2022 (compared to near zero growth in Q2).
Overall, economic indicators paint a better picture for India compared to much of the world. However, we will not be able to avoid the spill-over effects from weak demand in other major economies. After all, India derived 23% of its GDP from exports in Q1FY23.
Speedbumps ahead: 2023 recessions abroad worsen India’s outlook
According to the new IMF report, the worst is yet to come for global growth, and many countries will experience a recession in 2023. If we go by recent predictions from the economist Nouriel Roubini, the world is going to face a 'triple crisis' of high inflation, high debt and low growth in 2023. He terms this a ‘stagflationary debt’ scenario, which he predicts will be worse than the 1970 or the 2008 crisis. (Keep in mind however, that the media calls Roubini 'Dr Doom', because he is an incurable pessimist about the global market outlook. He's not going to 'buy the dip' anytime soon).
As a result, the Indian government has grown cautious. The Indian Finance Ministry’s recent report noted that geopolitical conflicts may further strain the supply chains of oil, natural gas, metals and fertilizers, as well as commodities like wheat and sunflower oil. This may push up India's inflation levels again in 2023. RBI economists say that the fight against high inflation is likely to be ‘dogged and prolonged’.
Oil producers are not helping. In an effort to keep oil prices high, the OPEC nations announced a production cut of two million barrels per day for crude oil, the highest cut since 2020. Accordingly, brokerages like Morgan Stanley and Goldman Sachs have raised their crude oil price forecasts for Q1-2023 to $100/bbl and $115/bbl respectively. This might worsen inflation in India and put pressure on its trade deficit.
Citing these concerns, analysts have cut growth forecasts for Indian GDP growth to below 7% in 2022. Although India will still be the fastest growing economy among the major nations, it may not come out unscathed in this global turmoil.
Screener: Outperformers with healthy growth in recent results, and strong FY23 estimates
As the Q2FY23 results start to roll in, we take a look at companies which have seen a jump in their revenues and net profits. This screener shows stocks that reported high YoY revenue growth and net profit growth in Q2FY23, and are also expected to post strong growth in FY23.
The screener is dominated by major Banks and NBFCs as well as IT Consulting & Software companies. Notable stocks are CreditAccess Garmeen, Canara Bank, Axis Bank, Avenue Supermarts and Syngene International.
CreditAccess Grameen saw a net profit growth of 2.7X in Q2FY23. All of CreditAccess' operating parameters rose to pre-covid levels, as its net customer base jumped to its highest level since March 2020, and return on assets touched pre-covid levels of 4%. Trendlyne’s Forecaster sees its annual net profit growing over 2X in FY23.
Canara Bank’s net profit in Q2FY23 grew 2.5X. The company beat forecaster estimates for revenue and net profit in Q2FY23 by 5.4% and 21.3% respectively. The bank’s asset quality has improved, as its gross and net non-performing assets declined by 205 bps YoY and 102 bps YoY, respectively.
Avenue Supermarts’ net profit grew by 64% YoY in Q2FY23. BNP Geojit Paribas believes that the company has strong recovery potential due to its healthy balance sheet, with no debt and strong operational efficiency. Forecaster expects the company’s net profit to jump 70% in FY23.
You can find some popular screeners here.
