#MAW 2022 – Navigating the Market Maze by Lakshmi Iyer

The current state of the market participants is unclear as we continue to navigate between the two heavyweights, which seem to be moving the markets with their commentary. On one side we have Mr. Jerome Powell who has the task of managing runaway inflation in the world’s biggest consumer economy while on the other side there is Mr. Vladmir Putin, who seems to be single handedly responsible for most of the chaos being witnessed in the European and world economy.

The last two years can be best summarized as a tale of two halves with the first half witnessing record stimulus as a result of money printing done by central banks of developed economy as a tool to fight covid induced slowdown. That however did come with its consequences as inflation runs amok in most parts of the world and the central bankers, now rushing to raise interest rates to fight inflation

The impact of the Federal Reserve raising rates has not gone unnoticed. The biggest impact has been seen in the crypto currency space, which has seen drawdowns between 50-90%

A lot of contrasting indicators in the USA also seem to be occurring which to any market participant is extremely confusing as the world grapples between inflation and recession. Some of the most notable one’s are:

• Lowest unemployment data is USA alongside lowest consumer sentiment recorded
• Dollar demand leading to substantial fall in most commodities alongside rising inflation
• Two vacancies available in the US for every potential employee

The world seems to be stuck between two extremes on oil, two different large banks have opposing views on crude oil prices ranging from $65 to $380 and the fact that makes it puzzling is that both sides of the argument are compelling enough for someone to believe either of them.

A happy ending in the current scenario looks plausible only when sufficient indicators of inflation peaking off are visible until which the market could continue to oscillate between two extremes

The current state of the Indian economy summarized:

• FDI flows in the Indian economy have doubled since 2013
• Deficit is surging but that is managed by exports going up as well
• Capacity utilization is almost back to pre covid levels of 75%
• GST collections have been increasing every month
• Capex by corporates, central and state governments have started to go up
• Credit growth has started growing in double digits again
• Credit ratio has seen a dramatic improvement with upgrades exceeding downgrades
• Monsoon has been normal across most parts of India over this year
• The cash balances with Central Government is high so that supports spending
• Consumption has started to revive after multiple quarters of negative volume growth
• The corporate profit to GDP ratio is going higher
• Indian economy better placed in 2022 versus commodity producing countries than in 2008 when the US housing bubble burst

Along with this the most heartening thing to note has been RBI’s commentary, which suggests that inflation might have peaked off across the country which could give an indication on where rates could be headed from here.

In terms of the micro economic picture, the Indian economy seems to have done much better with most of the indicators displaying a positive picture over the last seven years. The most notable of which has been the share in Global FDI Flows, which has moved up from 2.1% in 2014 to 6.7% in 2021. This indicates that a larger share of long-term foreign money is finding its way into India.

Despite such positivity on the economic front, the high selling by the FPI’s over the last 12 months have come as much of a surprise to most market participants. One reason for this can be the premium that Indian markets command against Emerging Markets (EM) ex Russia is at a 90% premium to its historic levels. This is the biggest premium witnessed in the last 10 years and has been rising since the covid bottom in 2020. This brings up an interesting conundrum that could all this positivity in the Indian economy is already in the price?

Then there is also the fact that FPI’s have made a lot more money in India since 2003 in USD terms than any other emerging economy including China and we all know that investors always return to markets where they have made good returns in the past.

The outlook for debt market in India summarized:

• The aggressive rate hikes by RBI have put a challenge to the growth in the economy
• The Federal Reserve Chairman has insisted that higher interest rates could persist for some time
• Indian economy is relatively better placed in terms of real rates wit lower inflation
• US inflation being higher than India could keep the real rates better in India
• RBI’s inflation projection for FY23 is in the forbearance limit
• The surplus liquidity in the domestic markets is now substantially lower
• The bond markets are already discounting a large part of the RBI’s action in the yield

Lakshmi presents an interesting view of the world economy and how difficult it is to fathom the direction in which it is headed considering multiple geopolitical and macro economic issuing plaguing the world. She does feels that the Indian economy feels like an oasis in the desert, displaying a calmer alternative, which explains the relative attractiveness, compared to other world economies. However, while some part of this positivity seems embedded in the pricing as displayed by the premium India commands to the emerging market basket. What’s interesting is how things shape up because the Indian economy doesn’t seems to be just starting out on its journey ahead.