In conversation with Anand Rathi, Founder and Chairman, Anand Rathi Group

While the Indian economy faces numerous challenges, the growth outlook is much better than what prevailed before the pandemic, affirms Anand Rathi, Founder and Chairman of Anand Rathi Group

What is your outlook on the Indian economy?  

High-frequency data including those relating to financial transactions, energy use and goods transportation suggest that right now, the Indian economy is doing reasonably well. Both exports and imports have maintained momentum. The urban economy, the corporate sector, and the overall organised sector seem to be doing reasonably well. At the same time, there are signs of lower economic activity in rural India, the unorganised sector and micro small and medium enterprises. Consequently, while the investment-linked activities are doing better than before the pandemic, many of the consumption-related areas, especially those relating to passenger transportation and hospitality, continue to remain weak.  

Despite all these hardships, according to the projections of the International Monetary Fund, India was the fastest-growing major economy in 2021 and the country is likely to maintain this position during 2022 also. While the Indian economy continues to face numerous challenges including volatility of growth, relatively weak consumption, elevated levels of inflation, challenges of creating a large number of gainful employment opportunities in the formal sector, India’s current growth outlook is much better than what prevailed before the outbreak of the pandemic. 

What is your outlook on broader markets?   

Broadly speaking, three issues determine equity market outlook - fundamentals, liquidity and valuations. As I discussed above, despite some fragility, in relative terms India's macro fundamentals look robust. With the organised sector gaining market share from the unorganised sector, the fundamentals for listed companies have improved more than the overall economy. While the corporate sector may now face margin pressures due to rising input costs and with the unfavourable base, earnings growth might slow down. Despite these, the overall equity market fundamentals for India look reasonably good. 

In terms of secondary equity market liquidity, there has been an improvement over the last two years. From the very low levels, the allocation by retail investors in equity assets has improved substantially. Various indicators suggest that higher allocation would continue. Consequently, the overdependence of the Indian equity market on foreign institutional investors for liquidity has gone down substantially. For example, from October 2021, foreign institutional investors have been net sellers in the secondary equity market of India. With increased inflows from retail investors, Indian mutual fund has bought equities to a long extent what has been sold by foreign institutional investors. This suggests, that the liquidity situation for the Indian equity market is also supportive. 

Currently, Nifty 50 is trading at a 23-24 price to earnings (PE) ratio. This is in line with the average price to earnings ratio since 2015. Therefore, while Indian equities are not cheap, the market is not very expensive either. 

For six successive years since 2016, Nifty 50 has generated a positive yearly return. After major correction in the early part of 2020, the Indian equity market rallied very sharply until October 2021. These factors along with the inherently volatile nature of equity markets suggest that it is difficult to forecast the very near-term outlook. While most of the domestic factors remain positive, large international risks including geopolitical uncertainties can result in global financial market corrections and India cannot remain unscathed in that situation. We however remain sanguine about a positive outlook for the Indian equity market in the medium to longer term. 

Will Indian markets outperform in 2022?  

Indian equities remained one of the best performing assets globally in terms of 1, 2, 3, 5, or 10-year returns. In fact, from 2000, in each year, Nifty 50 has been among the top 5 best performing equity index among the G 20 countries. Between 2000 and 2015, Nifty 50 in dollar terms considerably outperformed most US equity indices. From then until 2020, the Indian market underperformed the US. Considerable depreciation of rupee coupled with very strong outperformance of technology stocks in the US resulted in this. However, since 2021, India's outperformance has started again. The technology stocks which were so for the main reason for outperformance of the US market have started seriously underperforming. I think that with relatively better fundamentals, both macro and corporate, liquidity and a relatively reasonable valuation, Indian equities will continue to outperform most major global indices. 

What are the key risks for markets in 2022?  

Major part of the risk faced by the Indian equity market is on account of external factors. High inflation in the industrialised countries and the consequent near-term and aggressive monetary tightening including policy rate hikes and liquidity withdrawal seem to be the main near-term risks. This has already resulted in considerable correction in the equity markets and any intensification of monetary tightening can have a more near-term negative impact. Geopolitical uncertainties, especially those relating to Russia and Ukraine are also impacting the equity market. Global uncertainties are keeping certain commodity prices, especially crude oil, elevated. As one of the largest importers of crude oil, this is also a negative influence on the Indian economy as well as the equity market.  

With global investors turning risk-averse, there has been a withdrawal of cross border flows from India since October 2021. With foreign institutional investors holding more than 20 per cent of the market capitalization of the Indian equity market and more than 40 per cent of the free-float market cap, a major withdrawal by foreign institutional investors from the Indian equity market always remains a big risk factor. With the expectation that the inflationary situation in India will be better than most other countries, the Reserve Bank of India has indicated a more accommodative stance than most of the central banks. Higher than expected inflation can change the situation significantly. Weak rural demand is another risk factor.