Rattibha

Yearbook 2023 | Indian economy: An oasis in the desert 🏝️
Published by @hdfcmf
Here's a summary 👇🏼
1/n

2022: A year of challenging returns
👉 Rising inflation & interest rates + growth concerns + rollback of COVID monetary stimulus + geopolitical events = pressure on returns
👉 Most asset classes delivered negative returns, except💲, Oil🛢️ & agricultural commodities🌾
2/n

2022: A year of challenging returns
Global Equities: #NIFTY outperforms 😇as most global indices struggle 😢
India 🇮🇳 & Indonesia 🇮🇩 among the few markets to deliver +ve returns.
3/n

Currencies: The year of the Dollar
For most part 2022, the ₹ outperformed other EM currencies...
... but it depreciated faster in the last few months and ended the year weaker than other EM currencies against USD💲
4/n

Commodities: Surge in 20-21 till early 22.
Surge in energy ⚡️& agri commodity prices🌾in 20-21 due to:
👉 Post-Covid demand
👉 Supply constraints
👉 Liquidity infusion
👉 Russia-Ukraine war --> further surge 1H 2022
5/n

Commodities: Correction in 2H of 2022
Inflation --> higher interest rates --> monetary tightening --> Demand moderation --> easing of supply
6/n

2022: World Inching Towards Normalcy
👉 Growth normalised in most economies in 2022
👉 Higher inflation, interest rates and energy prices to weigh on growth in 2023
👉Fiscal deficit also set to normalise for AEs, but likely to remain at elevated levels for EMEs
7/n

2022: World Inching Towards Normalcy
👉Agg. sovereign debt to GDP trending towards pre-pandemic levels
- supported by strong nominal GDP growth + narrowing fiscal deficit
👉EMEs debt continues to remain high
8/n

Headwinds to Global Growth
Inflation catapulted due to 👇
- supply chain disruption
- pent up demand
- excess savings
- tight labour markets
9/n

Headwinds to Global Growth
👉Response by Central banks
- Policy rates now at decadal highs
👉…and reducing balance sheets
- G4 Central banks are expected to reduce balance sheets by ~USD 2 trillion in CY23
10/n

Counterbalance to Headwinds
👉Excess accumulated savings -> buffer for consumption against inflation
👉Unemployment % in major economies < pre-pandemic levels
👉HH debt as % of GDP trended lower after peaking during the pandemic -> may provide some support to consumption
11/n

US Economy: Recovering Demand Amid a Tight Labour Market
👉Real consumption trending higher
👉Labour force participation fell, lower participation of age 55+
👉…but growth moderating
👉Mortgage rates rising sharply, now > pre-GFC levels (housing ~17% of US economy )
12/n

China: Preparing for Near-Term Rebound, but LT Challenges Emerge
👉 Growth poised to recover after re-opening
👉 Avg age will rise + Working age population is likely to shrink -> impact on LT consumption growth
13/n

Euro Area: Under Pressure
👉Sharp rise in energy prices post the Ukraine war
👉Growth remains a challenge
- Retail sales are contracting YoY
- Composite PMI also in contraction zone
14/n

Global Oil: Tug of War
👉 Volatile prices due to several uncertainties on both the demand and supply side
👉 Demand is still below pre-pandemic levels
👉 Supply inelasticity to price is increasing
15/n

Global Gas : Higher for Longer?
👉 CY22 gas prices touched all-time highs
👉 EU plans to reduce dependence on Russian gas (~40% of total gas demand in 2021)
👉 This will structurally alter global gas markets
16/n

2023: India stands out
👎 Most economies are likely to experience a slowdown next year
👍 India’s 🇮🇳absolute and relative GDP growth remains attractive
17/n

India: Emerging Trends #1
🛍️ D2C brands
- 350-400m online shoppers 🔼 by '25, from 150-180m
- E-com penetration 🔼 ~15% by FY27
- D2C market to reach ~US$60b in FY27, (~USD 12 bn in FY22)
- Grocery 🥣 & Apparel + Footwear 👗👟 largest categories
18/n

India: Emerging Trends #2
🧬 Biotech in Pharmaceutical
Conducive funding env. driving biotech adoption
~$460bn funding during 2017-21
~Estimated biologic market size of $580 bn by'26
Challenges
- Competition - small/emerging cos ~73% of dev pipeline
- Mfg. complexity
19/n

India: Emerging Trends #3
⚡️🚗 Electric vehicles
++ Govt. subsidies on BEV direct cashback, tax refund or lower purchase tax.
Sales penetration ~10% in CY22, forecasts to almost full BEV penetration by '40.
... but, energy security & supply chain challenges remain
20/n

Indian Economy
👍 India 🇮🇳 grew steadily despite several global & domestic cycles and events
21/n

Indian Economy
Steady long-term drivers of resilience
👍 Highest growth likely over next 5y among all major economies
👍 Demographic advantage: Working age pop. likely to be highest globally in next 10y
👍 Total debt to GDP is the lowest amongst major global economies
22/n

Indian Economy: Structural growth drivers #1
- Macros -
👍 Thrust on infra, recovery in private capex & steady consumption
👍 Inflation likely to moderate in FY24; manageable levels of govt. borrowings
👎 Headwinds: Slowing global trade & Quantitative Tightening
23/n

Indian economy: Structural growth drivers #2
- Resurgence of Manufacturing -
👉 China+1 opportunity
👉 Favourable govt policies like PLI, reduction in taxes, tariff barriers, etc.
👉 Attractive FDI destination: Large market, competitive cost + favourable demographics
24/n

Indian economy: Structural growth drivers #3
- Private Capex prime for Pick Up -
👍 Improved corporate profitability & leverage
👍 High capacity utilization and reasonable demand outlook
👍 Banks b/s in good shape with low NPAs and strong capital adequacy
25/n

Indian economy: Structural growth drivers #4
- Infrastructure Capex and Housing -
👉 Central govt thrust on capital spending especially on roads, railways & defense likely continue
👉 Higher affordability & RERA to support better housing demand
26/n

Indian economy: Structural growth drivers #5
- Consumption -
👉 Large potential with under penetration across major consumer categories
👉 HH debt remains relatively low compared to other markets
27/n

Indian economy: Near-term risks
👉 Higher commodity prices can be a drag on external sector & corporate margins
👉Quantitative tightening by major central banks may impact capital flows to EMs
👉High inflation in AEs & monetary policy tightening -> impact on demand
28/n

Indian equities: Outperforms Major Global Counterparts
#NIFTY50 delivered 7th consecutive year of +ve return, a first since the inception of the index!
29/n

Indian equities: Sectoral performance
👍 Utilities outperformed on better underlying demand-supply
👍Banking did well driven by improvement in credit offtake & NPA moderation
IT + Healthcare lagged;
👎 Consumer durables sector underperformed due to high input prices
30/n

Indian equities: Valuations
👉 #NIFTY trades at premium to its historical average partly driven by superior relative growth prospects
👉 Valuation dispersion continues to provide sector and stock-specific opportunities
31/n

Indian equities: Broader Markets Valuation
👉 Mid Cap Index trades at ~30% premium to its historical average
👉 Small Cap Index trades at a lower premium
👉 Mid/Small have trailed on a medium-term timeframe
32/n

India: Rising Retail Participation
👉 Large selling by FPIs during the year reduced FPI ownership
👉 Returns were supported by strong DII flows in mutual funds and insurance
👉 Rise in retail participation has resulted in a multifold increase in F&O volumes
33/n

India: Global Valuation
👉 Global markets have corrected and now trade at or below LT valuations
👉India’s 🇮🇳premium to global markets has expanded
34/n

@HDFCMF's 2023 Year Book provides a detailed overview of 10 sectors.
Here, we give you prospects / Key Drivers / Risks of each in brief 👇
35/n

Sector Overview: 🚗 Automobile OEMs
👉 2W/3W/PV could see rapid shift towards EV in the next 1-3yrs
👉 Infra push & govt capex augurs well for MHCV & tractor segment in 2023
👉 Impact of consumer inflation likely to weigh on consumer segments (2W & PV) growth in '23
36/n

Sector Overview: 🏦 Banking & NBFCs
👉 India’s low System credit to GDP at 91% should drive higher credit growth over the next few years
👉Retail credit growth has been high 👏
👉 Several new listings of Fintech have increased the investment universe for BFSI
37/n

Sector Overview: Capital Goods
👉 Countries look to diversify supply chain --> pvt capex cycle improvement
👉 Improvement in public capex led by National Infrastructure pipeline
👉Key risks
Weak PLI, NIP scheme implementation, lower investments in core industries
38/n

Sector Overview: Consumer Staples (FMCG)
👉 India Per capita consumption < below Asian peers. This opportunity = long-term growth driver
👉 Risks:
- Already high penetration in large categories (soaps, toothpaste etc)
- Rising share of private label brands / D2C
39/n

Sector Overview: Infrastructure and Construction 🌉
👉HAM & BOT projects awards are rising, advantage for cos with strong b/s
👉 River linking & irrigation could become another big opportunity
👉 Bullet train 🚄contracts & Metros to drive order inflow in railways sector
40/n

Sector Overview: IT Services 👩‍💻
- Near term: Weakness in developed markets poses downside risks
- Med term: Higher mix of digital services & offshoring to aid growth
- Lower employee churn (wrt CY21/22) + improvement in utilization -> margin downsides are behind.
41/n

Sector Overview: Metals 🪙
👉 Heavy dependence on the impact of tightening monetary policies
👉 High inflation and energy crisis in EU
👉 China expected to stabilize with lockdown restrictions easing
👉 Key risk is weak demand and weakening of metal prices
42/n

Sector Overview: Oil & Gas 🛢️
👉 Low competitive intensity in auto fuel retailing – margins have headroom to expand in the long run.
👉 Diversification by cos. towards petrochemical & natural gas to gradually reduce earnings volatility.
43/n

Sector Overview: 💊Pharmaceuticals
👉Better 2-y outlook vs 22/23 due to commercialization of complex generics & certain products losing exclusivities
👉 But, investment opportunities will be selective given cos’ idiosyncratic growth drivers & differing investment cycles
44/n

Sector Overview: Telecom 📶
👉 With increased 5G adoption, average data consumption per user could double compared to 4G
👉 Accelerated 5G adoption could be a lever of revenue growth as customers upgrades to higher data allowances.
45/n

Now, on to Fixed Income Markets:
@HDFCMF calls 2022 Annus Horribilis for Global Bond Markets
46/n

Global Inflation and Rates: Is the worst behind?
@HDFCMF thinks Global inflation has likely peaked:
- Broad-based decline in commodity prices in H2CY22
- Supply chain pressures have eased, freight costs are off their peak
- Global growth likely to slowdown in CY23
47/n

India 🇮🇳: Emerging Signs of Softening Inflation
👉 No. of items for which prices rose by more than 0.5% (MoM) is trending lower, reflecting slowing inflation momentum
👉 WPI has come off its highs, should ease input price pressure on CPI, albeit with a lag
48/n

RBI close to ending rate hiking cycle?
👉 Real policy rate at current levels has turned positive, now higher than the long-term avg; this should slowdown growth and inflation over time
👉 Currency pressure has eased
49/n

RBI close to ending rate hiking cycle?
👉 Inflation has come off its peak, likely to moderate within the target range of 2% - 6% in CY23
👉 But core CPI likely to remain at elevated levels although lower than 6%
👉 Direction of core CPI may weigh on RBI’s decision
50/n

Fiscal Deficit: Gradual fiscal consolidation path
👉 Healthy tax collections in FYTD23, > Budget Estimates
👉 Expenditure could rise -> higher fertilizer subsidies + extension of free food grain scheme in FY23
👉 Fisc. def to remain close to BE (~6.4% of GDP) for FY23
51/n

Govt Borrowings
👉 Diversification of Investor Base likely to provide cushion against volatility
👉 Share of stable long-term buyers (eg insurance cos) rose, led to change in Gsec demand dynamics over last few yrs -> alternative source of demand for Gsec
52/n

Other Debt Market Trends - 1
👉 Credit upgrade to downgrade ratio is near all-time highs
👉 Lower supply of corporate bonds (both AAA and non-AAA rated) has resulted in credit spreads of corporate bonds over Gsec falling sharply vis-à-vis long term avg
53/n

Other Debt Market Trends - 2
👉 In CY22, Gsec yield curve flattened as liquidity normalized and RBI raised rates
.. while longer-end yields remained anchored driven by robust demand by long term investors like Insurance, provident fund (PF), etc.
54/n

Key Drivers of Interest Rate Outlook
👉Growth
👉External Sector
👉Inflation
👉Monetary policy
👉Market borrowings
@HDFCMF says that with global monetary policy cycle likely to peak in 2023, yields are likely to trade in a range with a downward bias.
55/n

Risks to Interest Rates Outlook
👉Inflation
👉Consumption
-Build up of capacities with elevated prices can result in pick up of investments and capital spending
👉Supply chain pressures
- still higher than pre-pandemic levels + China COVID concerns
56/n

What do you think about this? Tell us in replies.
♥️ and RT the first tweet if you liked this thread.
Follow @kuvera_in for more insights on investments.
—- Fin —-
57/57

Categories

More from this author

Related Threads

Popular Threads

Categories

More from this author

Related Threads

Popular Threads

Unroll Thread