Here’s a summary of Yearbook 2023 | Indian economy: An oasis in the desert?️ by HDFC mutual fund
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?
Global Equities: #NIFTY outperforms? as most global indices struggle ?
India & Indonesia among the few markets to deliver +ve returns.
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?
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
Commodities: Correction in 2H of 2022
Inflation –> higher interest rates –> monetary tightening –> Demand moderation –> easing of supply
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
?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
Headwinds to Global Growth
Inflation catapulted due to ?
– supply chain disruption
– pent up demand
– excess savings
– tight labour markets
?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
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
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 )
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
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
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
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
2023: India stands out
?Most economies are likely to experience a slowdown next year
?India’s absolute and relative GDP growth remains attractive
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
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
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
Indian Economy
?India grew steadily despite several global & domestic cycles and events
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
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
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
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
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
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
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
Indian equities: Outperforms Major Global Counterparts
#NIFTY50 delivered 7th consecutive year of +ve return, a first since the inception of the index!
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
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
India 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
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
India: Global Valuation
?Global markets have corrected and now trade at or below LT valuations
?India’s premium to global markets has expanded
HDFC Mutual Fund‘s 2023 Year Book provides a detailed overview of 10 sectors.
Here, we give you prospects / Key Drivers / Risks of each in brief ?
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
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
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
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
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
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
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
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.
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
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.
Now, on to Fixed Income Markets:
HDFC Mutual Fund calls 2022 Annus Horribilis for Global Bond Markets
Global Inflation and Rates: Is the worst behind?
HDFC Mutual Fund 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
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
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
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
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
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
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
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.
Key Drivers of Interest Rate Outlook
?Growth
?External Sector
?Inflation
?Monetary policy
?Market borrowings
HDFC Mutual Fund says that with global monetary policy cycle likely to peak in 2023, yields are likely to trade in a range with a downward bias.
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
What do you think about HDFC Mutual Fund’s report?
