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Jan 16 โ€ข 57 tweets โ€ข 34 min read
Yearbook 2023 | Indian economy: An oasis in the desert ๐Ÿ๏ธ

Published by @hdfcmf

Here's a summary ๐Ÿ‘‡๐Ÿผ

1/n
2022: A year of challenging returns

๐Ÿ‘‰ Rising inflation & interest rates + growth concerns + rollback of COVID monetary stimulus + geopolitical events = pressure on returns

๐Ÿ‘‰ Most asset classes delivered negative returns, except๐Ÿ’ฒ, Oil๐Ÿ›ข๏ธ & agricultural commodities๐ŸŒพ

2/n
2022: A year of challenging returns

Global Equities: #NIFTY outperforms ๐Ÿ˜‡as most global indices struggle ๐Ÿ˜ข

India ๐Ÿ‡ฎ๐Ÿ‡ณ & Indonesia ๐Ÿ‡ฎ๐Ÿ‡ฉ among the few markets to deliver +ve returns.

3/n
Currencies: The year of the Dollar

For most part 2022, the โ‚น outperformed other EM currencies...

... but it depreciated faster in the last few months and ended the year weaker than other EM currencies against USD๐Ÿ’ฒ

4/n
Commodities: Surge in 20-21 till early 22.

Surge in energy โšก๏ธ& agri commodity prices๐ŸŒพin 20-21 due to:

๐Ÿ‘‰ Post-Covid demand

๐Ÿ‘‰ Supply constraints

๐Ÿ‘‰ Liquidity infusion

๐Ÿ‘‰ 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

๐Ÿ‘‰ Growth normalised in most economies in 2022

๐Ÿ‘‰ Higher inflation, interest rates and energy prices to weigh on growth in 2023

๐Ÿ‘‰Fiscal deficit also set to normalise for AEs, but likely to remain at elevated levels for EMEs

7/n
2022: World Inching Towards Normalcy

๐Ÿ‘‰Agg. sovereign debt to GDP trending towards pre-pandemic levels

- supported by strong nominal GDP growth + narrowing fiscal deficit

๐Ÿ‘‰EMEs debt continues to remain high

8/n
Headwinds to Global Growth

Inflation catapulted due to ๐Ÿ‘‡

- supply chain disruption
- pent up demand
- excess savings
- tight labour markets

9/n
Headwinds to Global Growth

๐Ÿ‘‰Response by Central banks
- Policy rates now at decadal highs

๐Ÿ‘‰โ€ฆand reducing balance sheets
- G4 Central banks are expected to reduce balance sheets by ~USD 2 trillion in CY23

10/n
Counterbalance to Headwinds

๐Ÿ‘‰Excess accumulated savings -> buffer for consumption against inflation

๐Ÿ‘‰Unemployment % in major economies < pre-pandemic levels

๐Ÿ‘‰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

๐Ÿ‘‰Real consumption trending higher

๐Ÿ‘‰Labour force participation fell, lower participation of age 55+

๐Ÿ‘‰โ€ฆbut growth moderating

๐Ÿ‘‰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

๐Ÿ‘‰ Growth poised to recover after re-opening

๐Ÿ‘‰ Avg age will rise + Working age population is likely to shrink -> impact on LT consumption growth

13/n
Euro Area: Under Pressure

๐Ÿ‘‰Sharp rise in energy prices post the Ukraine war

๐Ÿ‘‰Growth remains a challenge

- Retail sales are contracting YoY
- Composite PMI also in contraction zone

14/n
Global Oil: Tug of War

๐Ÿ‘‰ Volatile prices due to several uncertainties on both the demand and supply side

๐Ÿ‘‰ Demand is still below pre-pandemic levels

๐Ÿ‘‰ Supply inelasticity to price is increasing

15/n
Global Gas : Higher for Longer?

๐Ÿ‘‰ CY22 gas prices touched all-time highs

๐Ÿ‘‰ EU plans to reduce dependence on Russian gas (~40% of total gas demand in 2021)

๐Ÿ‘‰ This will structurally alter global gas markets

16/n
2023: India stands out

๐Ÿ‘Ž Most economies are likely to experience a slowdown next year

๐Ÿ‘ Indiaโ€™s ๐Ÿ‡ฎ๐Ÿ‡ณabsolute and relative GDP growth remains attractive

17/n
India: Emerging Trends #1

๐Ÿ›๏ธ D2C brands

- 350-400m online shoppers ๐Ÿ”ผ by '25, from 150-180m

- E-com penetration ๐Ÿ”ผ ~15% by FY27

- D2C market to reach ~US$60b in FY27, (~USD 12 bn in FY22)

- Grocery ๐Ÿฅฃ & Apparel + Footwear ๐Ÿ‘—๐Ÿ‘Ÿ largest categories

18/n
India: Emerging Trends #2

๐Ÿงฌ 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

โšก๏ธ๐Ÿš— 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

๐Ÿ‘ India ๐Ÿ‡ฎ๐Ÿ‡ณ grew steadily despite several global & domestic cycles and events

21/n
Indian Economy

Steady long-term drivers of resilience

๐Ÿ‘ Highest growth likely over next 5y among all major economies

๐Ÿ‘ Demographic advantage: Working age pop. likely to be highest globally in next 10y

๐Ÿ‘ Total debt to GDP is the lowest amongst major global economies

22/n
Indian Economy: Structural growth drivers #1

- Macros -

๐Ÿ‘ Thrust on infra, recovery in private capex & steady consumption

๐Ÿ‘ Inflation likely to moderate in FY24; manageable levels of govt. borrowings

๐Ÿ‘Ž Headwinds: Slowing global trade & Quantitative Tightening

23/n
Indian economy: Structural growth drivers #2

- Resurgence of Manufacturing -

๐Ÿ‘‰ China+1 opportunity

๐Ÿ‘‰ Favourable govt policies like PLI, reduction in taxes, tariff barriers, etc.

๐Ÿ‘‰ Attractive FDI destination: Large market, competitive cost + favourable demographics

24/n
Indian economy: Structural growth drivers #3

- Private Capex prime for Pick Up -

๐Ÿ‘ Improved corporate profitability & leverage

๐Ÿ‘ High capacity utilization and reasonable demand outlook

๐Ÿ‘ 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 -

๐Ÿ‘‰ Central govt thrust on capital spending especially on roads, railways & defense likely continue

๐Ÿ‘‰ Higher affordability & RERA to support better housing demand

26/n
Indian economy: Structural growth drivers #5

- Consumption -

๐Ÿ‘‰ Large potential with under penetration across major consumer categories

๐Ÿ‘‰ HH debt remains relatively low compared to other markets

27/n
Indian economy: Near-term risks

๐Ÿ‘‰ Higher commodity prices can be a drag on external sector & corporate margins

๐Ÿ‘‰Quantitative tightening by major central banks may impact capital flows to EMs

๐Ÿ‘‰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

๐Ÿ‘ Utilities outperformed on better underlying demand-supply

๐Ÿ‘Banking did well driven by improvement in credit offtake & NPA moderation

IT + Healthcare lagged;

๐Ÿ‘Ž Consumer durables sector underperformed due to high input prices

30/n
Indian equities: Valuations

๐Ÿ‘‰ #NIFTY trades at premium to its historical average partly driven by superior relative growth prospects

๐Ÿ‘‰ Valuation dispersion continues to provide sector and stock-specific opportunities

31/n
Indian equities: Broader Markets Valuation

๐Ÿ‘‰ Mid Cap Index trades at ~30% premium to its historical average

๐Ÿ‘‰ Small Cap Index trades at a lower premium

๐Ÿ‘‰ Mid/Small have trailed on a medium-term timeframe

32/n
India: Rising Retail Participation

๐Ÿ‘‰ Large selling by FPIs during the year reduced FPI ownership

๐Ÿ‘‰ Returns were supported by strong DII flows in mutual funds and insurance

๐Ÿ‘‰ Rise in retail participation has resulted in a multifold increase in F&O volumes

33/n
India: Global Valuation

๐Ÿ‘‰ Global markets have corrected and now trade at or below LT valuations

๐Ÿ‘‰Indiaโ€™s ๐Ÿ‡ฎ๐Ÿ‡ณpremium 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 ๐Ÿ‘‡

35/n
Sector Overview: ๐Ÿš— Automobile OEMs

๐Ÿ‘‰ 2W/3W/PV could see rapid shift towards EV in the next 1-3yrs

๐Ÿ‘‰ Infra push & govt capex augurs well for MHCV & tractor segment in 2023

๐Ÿ‘‰ Impact of consumer inflation likely to weigh on consumer segments (2W & PV) growth in '23

36/n
Sector Overview: ๐Ÿฆ Banking & NBFCs

๐Ÿ‘‰ Indiaโ€™s low System credit to GDP at 91% should drive higher credit growth over the next few years

๐Ÿ‘‰Retail credit growth has been high ๐Ÿ‘

๐Ÿ‘‰ Several new listings of Fintech have increased the investment universe for BFSI

37/n
Sector Overview: Capital Goods

๐Ÿ‘‰ Countries look to diversify supply chain --> pvt capex cycle improvement

๐Ÿ‘‰ Improvement in public capex led by National Infrastructure pipeline

๐Ÿ‘‰Key risks
Weak PLI, NIP scheme implementation, lower investments in core industries

38/n
Sector Overview: Consumer Staples (FMCG)

๐Ÿ‘‰ India Per capita consumption < below Asian peers. This opportunity = long-term growth driver

๐Ÿ‘‰ Risks:
- Already high penetration in large categories (soaps, toothpaste etc)
- Rising share of private label brands / D2C

39/n
Sector Overview: Infrastructure and Construction ๐ŸŒ‰

๐Ÿ‘‰HAM & BOT projects awards are rising, advantage for cos with strong b/s

๐Ÿ‘‰ River linking & irrigation could become another big opportunity

๐Ÿ‘‰ Bullet train ๐Ÿš„contracts & Metros to drive order inflow in railways sector

40/n
Sector Overview: IT Services ๐Ÿ‘ฉโ€๐Ÿ’ป

- 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 ๐Ÿช™

๐Ÿ‘‰ Heavy dependence on the impact of tightening monetary policies

๐Ÿ‘‰ High inflation and energy crisis in EU

๐Ÿ‘‰ China expected to stabilize with lockdown restrictions easing

๐Ÿ‘‰ Key risk is weak demand and weakening of metal prices

42/n
Sector Overview: Oil & Gas ๐Ÿ›ข๏ธ

๐Ÿ‘‰ Low competitive intensity in auto fuel retailing โ€“ margins have headroom to expand in the long run.

๐Ÿ‘‰ Diversification by cos. towards petrochemical & natural gas to gradually reduce earnings volatility.

43/n
Sector Overview: ๐Ÿ’ŠPharmaceuticals

๐Ÿ‘‰Better 2-y outlook vs 22/23 due to commercialization of complex generics & certain products losing exclusivities

๐Ÿ‘‰ But, investment opportunities will be selective given cosโ€™ idiosyncratic growth drivers & differing investment cycles

44/n
Sector Overview: Telecom ๐Ÿ“ถ

๐Ÿ‘‰ With increased 5G adoption, average data consumption per user could double compared to 4G

๐Ÿ‘‰ 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 ๐Ÿ‡ฎ๐Ÿ‡ณ: Emerging Signs of Softening Inflation

๐Ÿ‘‰ No. of items for which prices rose by more than 0.5% (MoM) is trending lower, reflecting slowing inflation momentum

๐Ÿ‘‰ 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?

๐Ÿ‘‰ Real policy rate at current levels has turned positive, now higher than the long-term avg; this should slowdown growth and inflation over time

๐Ÿ‘‰ Currency pressure has eased

49/n
RBI close to ending rate hiking cycle?

๐Ÿ‘‰ Inflation has come off its peak, likely to moderate within the target range of 2% - 6% in CY23

๐Ÿ‘‰ But core CPI likely to remain at elevated levels although lower than 6%

๐Ÿ‘‰ Direction of core CPI may weigh on RBIโ€™s decision

50/n
Fiscal Deficit: Gradual fiscal consolidation path

๐Ÿ‘‰ Healthy tax collections in FYTD23, > Budget Estimates

๐Ÿ‘‰ Expenditure could rise -> higher fertilizer subsidies + extension of free food grain scheme in FY23

๐Ÿ‘‰ Fisc. def to remain close to BE (~6.4% of GDP) for FY23

51/n
Govt Borrowings

๐Ÿ‘‰ Diversification of Investor Base likely to provide cushion against volatility

๐Ÿ‘‰ 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

๐Ÿ‘‰ Credit upgrade to downgrade ratio is near all-time highs

๐Ÿ‘‰ Lower supply of corporate bonds (both AAA and non-AAA rated) has resulted in credit spreads of corporate bonds over Gsec falling sharply vis-ร -vis long term avg

53/n
Other Debt Market Trends - 2

๐Ÿ‘‰ 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

๐Ÿ‘‰Growth
๐Ÿ‘‰External Sector
๐Ÿ‘‰Inflation
๐Ÿ‘‰Monetary policy
๐Ÿ‘‰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

๐Ÿ‘‰Inflation

๐Ÿ‘‰Consumption
-Build up of capacities with elevated prices can result in pick up of investments and capital spending

๐Ÿ‘‰Supply chain pressures
- still higher than pre-pandemic levels + China COVID concerns

56/n
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1/n

Drawdown - "A drawdown is a peak-to-trough decline during a specific period for an investment"

For eg. Nifty 50 went from 12,088 to 10,980 since early June or a Drawdown of ~10%.
2/n

The markets are almost always in a drawdown.

Only 6% of trading days since 1990 produced new market highs i.e for 94% of trading days the market was in a drawdown.

The average drawdown for NIFTY 50 over the past 29 years has been -18%!!
3/n

So what about a -10% drawdown.

Nifty 50 has been in a -10% or worse drawdown in 59% of the trading days since 1990.

Read the above sentence again.

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