Separate the Chaff from the Grain
The NSE benchmark Nifty 50 has recently hit a swing high of 18,458.90, but it now appears to be running out of steam. However, the broader markets have shown resilience, outperforming expectations. The Nifty MidCap 100 hit a fresh 52-week high and Bank Nifty narrowly missed an all-time high. Volatility, which had been abating, has once again slipped below the 13 mark. Foreign institutional investors (FIIs) continued their buying streak for 15 consecutive days with Rs 16,520 crore worth of shares purchased in May. However, the recent dip in buying numbers hints at a potential exhaustion in the market.
In this editorial, we will explore an intriguing insight. India has been dubbed the ‘next best thing’ on multiple occasions over the past three decades. From the early 1990s, when the economy opened up, to the coining of the term BRICS in 2001, India’s potential was highlighted. During the global financial crisis, India and China emerged as strong pillars of support, growing at high single-digit rates despite the turmoil. Today, as India emerges as one of the fastest-growing economies post the pandemic, the narrative of its potential is resurfacing.
The Indian economy has never been as strong in the past four decades with sustainable growth projected for years to come. However, the investment theses need to be realistic and moderate, as direct comparisons to China’s or America’s growth may lead to discontent. India may have taken the escalator but has a long way to go in terms of infrastructure development. The gap is revealed when you compare it to China’s industrial estates and high-speed rails of the 1990s. China has about 45,000 km of high-speed rail running at a speed of 280-310 km per hour while we are expecting the first 200 km of such trains not before 2026.
India’s deprived productivity, particularly in the agriculture sector, contributes to the challenge. Every incremental investment in the rupee yields lower GDP growth compared to other countries. India’s present market capitalisation already exceeds its FY23 nominal GDP. To make Indian markets attractive, the GDP needs to grow faster than the stock market. Achieving a USD 5 trillion economy by 2027 (from the current USD 3.5 trillion) could result in a USD 4.5 trillion market capitalisation in three years. However, this would require a 14 per cent compound annual growth rate (CAGR) with many uncertainties.
Some market participants speculate on the rupee’s emergence as a key global currency. Yet, with India’s share in global merchandise trade below 2 per cent and global services’ trade below 5 per cent, this proposition lacks substance. India has struggled for over two decades to get Indian bonds included in global indices with no visibility of that happening soon. While it’s encouraging to hear global CEOs speak highly of India’s potential, caution is advised when interpreting their comments for investment decisions. Many comments may be driven by vested interests or to secure government subsidies under the PLI scheme, etc.
For instance, Apple’s local manufacturing in India primarily aims to save on import duties. When evaluating the staggering iPhone exports from India, it’s crucial to consider the significant import content and low revenue-to-employment ratio of the assembly factories. That said, I remain extremely positive about the ‘India story’ for the next decade, but realistic expectations are essential. Extrapolating the current numbers based on China’s or America’s growth experiences is impractical. A small premium on nominal GDP growth over the next decade would be gratifying. In the US markets, the late rally aided the Nasdaq Composite index in achieving its highest close in almost nine months. Optimism grew over a potential debt ceiling deal and stability in regional banks.
President Joe Biden expressed confidence that the US would not default on its debt, aligning with House Speaker Kevin McCarthy’s earlier sentiments. This positive backdrop, along with the Nifty’s support level at the 20-day moving average (18,080), provides an opportune moment to buy on market dips as the index reverts to its mean. In conclusion, while the Nifty 50 shows signs of exhaustion, the broader markets exhibit resilience and outperformance. India’s economic growth is impressive, but the investment theses should be approached with realism and moderation. The Indian market’s attractiveness as an investment destination depends on sustainable GDP growth outpacing the stock market.
