But the market will also watch the Adani saga closely as it could affect lenders and also other blue chips for suspected corporate governance issue
India’s benchmark stock index closed around 17891.95 Tuesday; slumped -1.25% on Adani woes as Adani Group’s shares tumbled after influential U.S.-based Hindenburg Research (activist investor) issued a negative report, initiating a short position in the company. Hindenburg alleged various frauds including accounting jugglery, stock price manipulation, money laundering, and other criminal activities against the Adani group, which later denied the allegations altogether.
In any way, Adani group stocks (such as Adani Enterprise, and Adani Ports) and related banks & financials having significantly higher exposure with the group (such as SBI (NS:), HDFC, ICICI, Axis and Indusind) also tumbled. But as the weightage of Adani group stocks is negligible, the crash resulted in only a -10 points slip in Nifty, while HDFC group, RIL, ICICI bank, SBI, and Axis Bank (NS:) cumulatively caused around -150 points slide in Nifty out of -226 points. After Satyam, Yes Bank (NS:) fiasco, the market is now quite concerned about corporate misgovernance. Additionally, it’s a fact that the Adani group of stocks is significantly overvalued and highly leveraged and it has employed a small unknown auditor firm, which is very surprising for a big corporate like Adani.
On Tuesday, Nifty closed around 18104.80, almost flat for January (till date), but off the cycle low of 17779.50 on upbeat PMI data, easing of headline inflation, mixed earnings, and hopes of slower rate hikes optimism. As the U.S. economy, labor market as well as core inflation is cooling down, but still, substantially above +2.00% targets, Fed may shift to slower rate hikes (calibrated tightening) to ensure a soft/softish safe landing instead a bumpy hard landing (an all-out lingering recession). Thus Fed may now go for +25 bps rate hikes each on 2nd February, 22nd March, and 3rd May to arrive at a preliminary terminal rate of +5.25% (from present +4.50% in line with the December SEP).
Looking ahead, Fed will watch the trajectory of core inflation from Dec’22 to May’23 (6M rolling average). Presently, the core CPI average is around +6.00%, while the December reading was +5.70%. If the 6M rolling average of core CPI indeed comes down to around 5.00% by June’23, then Fed may keep the terminal rate around +5.25%. Alternatively, if the 6M rolling average of core CPI falls to +5.25%, then Fed may go for another +25 bps hike in June for a terminal rate of around +5.50%. In the worst-case scenario, if the 6M rolling average of core CPI sticks to around +5.50% or +5.75% by May’23. Then Fed may opt for further rate hikes @25 bps to reach +5.75% or +6.00%.
As per the pre-COVID trend and comments by Fed Chair Powell, Fed may like to keep the terminal rate at least above 25 bps of average core CPI to have a real positive rate (wrt at least core inflation). And if average core CPI indeed falls well below 3% on a sustainable basis by June’24 due to rate hikes, QT-financial tightening, and easing of supply disruptions, then Fed may also go for calibrated rate cuts ahead of Nov’24 U.S. Presidential election to boost up the economy and employment/labor market. In the meantime, Fed is ready to allow the U.S. unemployment rate to soar to 4.5-4.7% to bring down core inflation towards +2.00% targets.
Now from global to local, India’s RBI is also bound to follow Fed’s rate action with some policy differential. Like in U.S. average core inflation is also around +6.00% in India and is quite sticky. Thus RBI may also like to keep the terminal rate at least +50 bps above average core CPI to +6.75% by June’23. RBI may hike +25 bps on 8th February and pause in April but may hike again +25 bps (in response to Fed’s likely hikes of +25 bps each in March and May) in June for a terminal rate +6.75% (against Fed’s likely +5.25%). If Fed goes for a pause after June’23, RBI may also follow and vice-versa.
The market is also expecting a blockbuster budget from the Modi admin on 1st February as it’s the last full budget before the early 2024 general election. As per various reports and BJP/RSS’ assessment, this time BJP/Modi is going to win convincingly as there is no alternative credible/acceptable national leader who can compete with Modi’s popularity and corruption-free developmental image. But this time BJP may not get have enough Parliament seats (magic figure) for a 2/3rd majority or even 50% simple majority due to various regional political factors, permutations & combinations, Muslim/minority vote bank factors coupled with general economic issues (high inflation/cost of living, growing youth unemployment and income inequalities).
Thus Modi admin may go for a significant increase in targeted fiscal stimulus (higher infra capex, especially in railways including semi-high speed Vandebharat express promotion/expansion across the country) and various income tax sops for the middle class (higher income limit from min 5L to 10L, higher SD from 50K to 100K), etc in the forthcoming budget. The Indian government is also taking some supply-side issues to rein on surging food inflation. Unlike Europe, India is not dependent on imported food.
The Indian banking/financial system is now robust and banks are lending prudently even with +18% advance growths; banks are now writing-back NPAs from past write-offs; i.e. recovering past bad loans. Most of the major Indian corporates are also reporting +20% annual growths in core operating EPS amid robust demand and deleveraging.
Indian consumer spending is also resilient despite the higher cost of living because almost 30% of the Indian middle-class population, equivalent to the entire U.S. population has stable jobs/income (government and reputed corporate employees), and has adequate real wage growths regularly. Many Indian super riches are now growing rapidly, thanks to the vibrant stock & real estate market and digital ecosystem.
Also, despite DEMO in 2016, the flow of black money in the Indian economy is still robust due to rampant corruption at almost all levels, especially in various infra projects (cut money) and even certain state levels of government employment. Thus, despite higher inflation, higher borrowing costs, and higher cost of living, the Indian consumer spending story is still robust.
In brief, India is now being seen as an island of stability in a turbulent ocean despite higher and higher oil. Higher USD is good for Nifty EPS as almost 60% of Nifty revenue comes from exports. If we consider Indian service export, robust remittances, and stable FDI inflows, Indian CAD (current account deficit) servicing is quite manageable; no need for any undue concern/panic.
The current sequential run rate of Nifty EPS (consolidated) growths is around 3.75%; i.e. annualized +15.00%. As per the current sequential run rate, FY23 EPS may come to around 931, and assuming +20% CAGR for FY: 24-26, the consolidated Nifty EPS may print around 1070-1284-1541. And assuming a median/average PE of 20, the average fair value of Nifty may be around 18600-21400-25700-30825 for FY: 23-26.
As the financial/stock market generally acts on expectations or discounts 1Y projected/forward EPS in advance, Nifty may scale around 21400-25700-30825 by Dec’23/Mar’24, Dec’24/Mar’25 and Dec’26/Mar’27. Further, if Fed/RBI indicates rate hike pauses after March/June’23 and Russia-Ukraine/NATO geopolitical tensions do not worsen further leading to WW-III (nuclear war) situation, then Nifty may scale around 20150-450 by Mar’23 also.
In Q4FY23/FY24, Nifty earnings may be boosted by higher commodity prices amid China reopening. Although a higher interest rate regime (bond yield curve steepening) is positive for banks & financials and negative for non-financials corporates to some extent, there may be also elevated retail NPA as most of the loans including mortgages are on a floating interest rate basis. And most of the big Indian corporates are now largely deleveraged or have the sufficient positive cash flow to service loans. In any way, both Fed and RBI may indicate rate cuts in early 2024 if there are signs that inflation is steadily easing towards targets, Dalal Street and Wall Street will also flare up ahead of the respective general election on the expectations of lower borrowing costs.
India is a bright spot in a gloomy world and a favorite among EMs (except China) for global investment due to political and policy stability. Thus Indian stock market enjoys a scarcity premium and higher PE compared to its peers or even AEs.
BRICS (Brazil, Russia, India, China, and South Africa) were the investment theme in the early 2000s when EM investors hoped to capitalize on their economic growth and population expectations, as well as their sources of raw materials/commodities. Except for China, India now has the most political/policy and macro stability. Also growing political chaos in big Western democracies is causing policy paralysis and working advantageous for not only India but also China. India may become the world’s 3rd largest economy by 2030 if policymakers can focus more on targeted fiscal stimulus/reform, capex, especially railway and EV to improve productivity. India has to also improve its innovation to compete with South Asian exporters and also some AEs. India is now a major beneficiary of political/policy stability and the appeal of 5D (development, demand, demography, deregulation, and digitalization
But at the same time, India needs to control its huge population to improve GDP/per capita and growing unemployment (8.30% in Dec’22, higher than pre-COVID levels of 7.8%). India is now around $3.4T economy, 5th largest in the world (nominal GDP at current prices) along with a population of around 1.42B; i.e. GDP/Capita is only around $2395, at 20th position in G20. Even with a projected $5T economy along with a 1.50B population by 2030, India’s GDP/Capita will be only around $3333 and should remain at the 20th position in G20; China’s present GDP/Capita is now around $11500 compared to the U.S. around $6200, Singapore’s $66300, Indonesia $3950, South Africa $6000, Brazil $8700, Mexico $9600 and Russia $10000.
There is a need for political courage/wish for a big-bang reform like India’s population control. Although various BJP-ruled states are talking about it directly/indirectly like the ban of any government job or subsidy for any family above 2 children, the Indian Federal government led by PM Modi should make it a universal policy, without worrying about certain vote banks as now BJP/Modi has virtually no credible political opponent/opposition at the national level.
Also, India’s goal of snatching the ‘world’s factory’ tag from China is being held back by the country’s inability to attract bigger container ships due to inadequate port infrastructure. Most harbors along India’s coast aren’t deep enough to handle bigger container ships. Despite India’s advantageous strategic location between the Suez Canal and the Strait of Malacca, port limitations mean it risks falling behind in the competition for a bigger slice of trade as productions/supply chains move away from China for various geopolitical reasons. India is the biggest stable democracy in SE Asia, having huge manpower (low-cost labor) to compete with China. But India also needs more deregulation and a lower direct tax structure to compete with China, Vietnam, and other SE Asian exporters.
India also pays almost 45% of its tax revenue as interest on public debt and over 40% on salary & pensions for government employees (including militaries/other agencies). Although a huge pool of government employees is also providing robust consumer spending (discretionary) amid real wage growths, job stability, and family pension security for a lifetime, India needs to control its sticky core inflation for relatively lower bond yield and lower borrowing costs for overall lower cost of living for the masses. Also, India needs to improve its innovation and productivity, which is the ultimate.
Looking ahead, whatever may be the narrative, technically Nifty Future now has to sustain over 17900 for a rally towards 18225/18275-18335/18450*-18515/18555 and further 18950/19025* in the coming days; otherwise sustaining below 17850-800, Nifty Future may further fall to 17680/17625* and further 17500-17350/17200* and 17075/16640* in the coming days.
Going forward, the market will focus on Fed/RBI action, Q3FY23 report cards (earnings and guidance), overall macros, and the FY23 budget/nature of the fiscal stimulus ahead of G20 and the early 2024 general election. And the market will also watch the Adani saga closely as it could affect lenders and also other blue chips for suspected corporate governance issues. In the worst-case scenario, Government/SEBI may also remove Adani stocks from Nifty if the Hindenburg report/allegations come true even to some extent or for some other reasons. Fortunately, very few DIIs or FIIs own Adani group stocks significantly even after the stupendous rally of around 890% on average in the last three years.