India’s economic and earnings growth strength, coupled with a possible recession in the US are the two key reasons behind India’s outperformance and we are hopeful that this outperformance should continue due to 3 reasons.
1. The US 2-year and 10-year rates are close to peak backwardation with the 2-year being at 4.9% and the 10-year at 4.0%. This difference has widened from 50 bps a month ago to ~90-100 bps. The raising of the debt ceiling has not softened it either. We are also expecting the FED to hike interest rates by 25 bps hike in the July 25-26 FOMC meeting. The US has tightened the liquidity (QT) by almost US$ 500 billion YTD to US$ 21.1 trillion and its debt at almost US$ 32 trillion is at an all-time high. This means a higher possibility of a recession and the US being forced to slow down the economy further by raising rates. As against this, India is in normal contango at 7.07% and 7.16%, respectively, with a positive yield of 10 bps. The positive yield of India as against the negative yield in the US suggests a possible recession in the US as against steady-state economic growth in India especially on its domestic front. (Source: Bloomberg)
2. The rupee-dollar movement has been a dampener to investors, depreciating by 4-5% every year for the last two decades. The forex reserves of the country have moved close to peak levels of $595 bn and with crude and coal prices having softened, we may see even higher reserves of as much as $650 bn in the next 12 months. This should lead to the firming up of the rupee. The CAD which had peaked at -3.7% in the quarter of September 2022 has already narrowed down to -0.2% in Q4F2023. (Source: Bloomberg)
3. Increasing Earnings trajectory – India Inc has witnessed strong growth in earnings, especially post Q2F2023, wherein we have seen EBITDA margin improvement of almost 250 bps and a PAT growth average of 25% QoQ each quarter (not including financial which had witnessed higher growth due to reduction in provisions). We believe this trend of high growth should continue and India Inc should grow at ~15% in F2024 (not including the higher earnings from OMCs) aided by domestic facing sectors.
F1Q2024 itself should showcase around 10% revenue growth but improving margins should lead to twice as much earnings growth of ~25%. The energy sector due to losses in F1H2023 and frozen petrol and diesel prices should witness extraordinary profits, which if we include in India Inc. earnings could lead to more than doubling F1Q 2024 PAT growth rate. (Source: JM Financial Research) The Indian equity markets have shown signs of decoupling historically versus the US markets through the fall during any global crisis, India reacts more negatively initially probably due to its historic fiscal deficit, and its recovery post-global issues has always been very strong. We underperformed only when there have been India-specific issues. During the GFC in 2008 when US markets fell 38%, Indian markets were down 52%. However, the recovery post that ie in 2009-10, was much faster where the Indian market outpaced US markets by 67%. Even during COVID, in the first three months of 2020, India was down 29% as against the US 20%, and it seemed the Indian markets would continue to fall, however, India has more than doubled since COVID lows. (Source: Bloomberg)
The recovery phase both post GFC and COVID, India has moved from strength to strength, outperforming the world. Apart from the Indian Economic strength currently compared to the rest of the world, the Indian Equity MF AUM market too has blossomed increasing to over Rs 30 trillion (US$ 365 Bn) up 3 fold in 5 years and 15 fold in 10 years. Retail India inflows from SIP in the last 12 months have been an impressive US$ 20 bn, thus reducing the country’s dependence on global inflows. (Source: AMFI)