Sengol & Indian Bull Market

Sanjiv Mehta  |  2023-06-03

Prime Minister Narendra Modi inaugurated the new Parliament building on May 28, 2023. In his speech, he called for making India a developed nation by 2047, the 100th anniversary of its Independence. He called the period of next 25 years as Amrit Kaal which can be marked by tremendous progress and giving a new direction to the nation.

Sengol has caught major national attention, very few people knew about it earlier. It is a 5 feet long spectre, carries a golden Nandi Bull at the top and is a powerful symbol of the Chola Kings commitment to good governance and justice. It is now installed in the new parliament building next to the Speaker as a national symbol of the Amrit Kaal.

India seems well positioned for a sustainable structural growth for a long period and it seems that Amrit Kaal has a good probability of materializing. Morgan Stanley in its report of May 2023 stated that during the last 10 years, India has moved up significantly in the world order with positive consequences for the macro and market outlook. They mention 10 major changes including supply side policy reforms (lower corporate tax, infrastructure investment), formalization of the economy (rising collection of GST, rising share of digital transactions), Real estate regulation act, digitalizing social transfers, Insolvency and bankruptcy code & Flexible inflation targeting. India’s per capita income will rise from $2200 to $5200 by 2032 with major implications for the discretionary consumption basket.

Geopolitical situation is also very favorable presently for India. China’s possible parity with USA, combined with its aggressive stance, is causing lots of concern. Reduction of western support is making it difficult for China to maintain their usual high economic growth rate. Also, India is becoming a major beneficiary of ongoing supply chain diversification, where a major catalyst was Covid 19.

If we zoom in to the current scenario, India’s latest Q4 FY 23 GDP figures declared on June 1, 2023 were stronger than expected, those lifted the annual growth to 7.2% in FY 2023, underscoring the country’s economic resilience in the face of multiple challenges. Corporate earnings growth figures of the same quarter have also been quite good.

RBI is expected to maintain the pause in interest rate hikes. In its report of May 2023, RBI maintained its 6.5% growth estimate for FY24 predicated on moderate inflation risk, strong macro fundamentals, healthy corporate sector balance sheets, rollout of structural reforms, sound external sector and fiscal policy thrust on capex. It will be the 3rd year in succession for India to be the fastest growing major economy in the world.

Foreign institutional investors have also lately increased their flows to India. Based on the results of the latest Markets Live Pulse survey (234 money managers, mainly based in USA and Europe, were interviewed), the main conclusion was that Emerging Markets asset class is presently very attractive. EM central banks have dealt with inflation effectively, there is no stimulus hangover and quite a few EM economies are far more resilient and therefore, there is significant value in EM. Those EMs that can sustain reasonable levels of potential output and businesses that can create value are the best investment choice over the next 12 months.

In the USA, many analysts feel that Fed is likely to pause their interest rate hikes, since the monetary policy works with a lag, they will like to assess the impact of previous hikes. Some analysts also feel that the present fed fund rate might be the most optimum to bring down the inflation to 2% by 2025 while not causing a hard landing. Technological innovation might even give a boost to the USA economy. Mark Mobius in his latest book ‘Inflation Myth and the Wonderful World of Deflation’ emphasizes that you can have deflation and growth at the same time because if the company or country is productive, they are going to be producing more and more goods and services at lower and lower prices. May 2023 has been a historic month for investors in technology, S&P 500 Information Technology sectors beat the rest by more than 10 percentage points for the first time in two decades. Obviously, the latest catalyst was the ChatGPT app six months ago, while the just-ended blowout month can be attributed to Nvidia Corp.’s astonishingly strong sales of chips as interest in artificial intelligence surged. So there is optimism, at least in some quarters, building up for the USA economy and markets.

Potential risks include El Nino and its adverse impact on rainfall. This can affect macroeconomic stability and food prices in India. Shortages in skilled labor supply and a fragmented election outcome in 2024 are other risks. Global risks include moderating global growth, protracted geopolitical tensions, and a possible upsurge in financial market volatility due to the implosion of USA regional banks. A sharp rise in commodity prices, especially Oil, could be destabilizing for the Indian economy.

Overall, it is my considered opinion that a long-term bull market in Indian equities is being initiated and these current levels offer an attractive buying opportunity for your goals with a time horizon of 3 years or longer. The best way to express this view will be through highly regarded diversified equity schemes. We should always be aware of the risks, and it is always possible for markets to experience temporary dips. Also, with global uncertainty, some part of our portfolio should always be invested in high-quality short-term debt funds to take care of liquidity and any contingencies.

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