Key downside risks to the growth outlook include persistent weakness in rural demand, slowing global growth and lagged impact of past rate hikes
Tirthankar Patnaik, PhD
Chief Economist
National Stock Exchange of India Limited (NSE)
Mumbai, December 28, 2023: This is second part of the series on the December edition of the ‘Market Pulse’, published by NSE. The first part was published on this website on December 26, 2023.
Higher Participation Has Gathered Pace
In terms of market activity, the average daily turnover in NSE’s cash market segment rose by 5.1% MoM to Rs 70,615 crores in November, but on top of a near 20% drop in the previous month, while that in the equity options and equity futures dropped by 12.4% and 4.5% MoM respectively to Rs 46,581 crores and Rs 1.15lakh crores respectively. Individual investors remained the dominant player with a 35% share of overall cash market turnover in this fiscal year thus far—the lowest in last eight years but much higher than the 27% share of institutional investors — domestic as well as foreign. Notwithstanding this drop, the influx of new investors and consequently higher participation in terms of number of active investors has gathered pace over the last few months. New investor registrations at NSE averaged at 13lakhs/month in the first eight months of FY24 vs. 11lakhs/month in FY23.
NSE’s journey from 7 crore to 8 crore unique PANs took just eight months. Districts beyond top 100 accounted for 46.4% of new investor additions this year.
Share of Consumer Discretionary and Industrials in aggregate corporate earnings to rise over the next few years:
Notwithstanding accentuated geopolitical conflicts, expectations of global growth slowdown gathering momentum next year, coupled with a sustained weakness in China, is likely to keep a check on commodity prices. Further, global growth slowdown is also expected to continue to weigh on demand for IT services. Consequently, the share of Energy and IT sectors to aggregate corporate earnings estimates of top 200 companies is expected to drop over the three years. Utility and Consumer Staples companies are also expected to see a drop in their respective share in overall corporate earnings of these 200 companies, with the latter weighed down by weak rural demand. The reduced share of these sectors to aggregate corporate earnings during this period is expected to be primarily taken over by Consumer Discretionary, and Industrials, while that for Financials is expected to remain steady at about 31%. Clearly, the earnings trajectory over the next two years hinges on persistence of consumption and investment demand.
The analysis shows how Consensus estimates usually begin the year (calendar) with a bullish view on earnings, but are then brought back to terra firma with downgrades, year after year, as the macro environment overhang prevails over optimism. A different story has played out this time, with earnings for the Nifty 50 companies steadily getting revised upwards for 2024 and 2025, barring interim bouts of small cuts. The EPS estimates for Nifty 50 for 2024 and 2025 are up 7.8% and 10.7% each from their initial estimates.
Nifty 50 Earnings Revision Indicator improved after a strong Q2:
After a sharp drop following the onset of the Russia-Ukraine war in February 2022, the Earnings Revision Indicator (ERI)7 for the Nifty 50 universe picked up meaningfully in the second half of 2022, indicating higher number of upgrades than downgrades. This was aided by resilient economic performance, strong Government capex and robust credit offtake by banks. Since then, the ERI has hovered in a tight range, and has moved into positive territory now after a strong Q2. This was on the back of upgrades in Consumer Discretionary, Energy and Industrials that have more than made up for downgrades in Information Technology, Materials and Consumer Staples.
Global update—rate cut expectations heightened amidst slowing global economy:
Growth holding up but stress in consumption persists. The impact of the Government’s infra push, along with real estate revival, is visible in robust growth of Steel and Cement that have remained the best performing sectors in FY24TD along with coal. Though the Services PMI slowed down, Manufacturing PMI recovered, with both remaining well within the expansionary zone. That said, the consumption recovery remains incomplete with both Consumer Durables and Non-durables recording a contraction on a two-year CAGR basis. Headwinds to the rural demand persists with rising food inflation (Rural Food Inflation: 8.38%YoY), lower Kharif production and uncertainties around Rabi sowing. Trade deficit narrowed on weak domestic demand while INR remained range bound. Headline inflation rose to 5.6% while core eased further; MPC shifted to a balanced tone. Centre’s fiscal position remains comfortable.
The global economy is showing signs of slowdown with (i) Eurozone contracting by 0.1% in Q3CY23 due to continued downturn in business activity, (ii) the Japanese economy shrinking by 0.7% QoQ in Q3 (vs. +0.9 % in Q2) on weak domestic private consumption and external demand and (iii) slowdown in the UK economy (0% QoQ in Q3 CY23) led by contraction in investments, household spending and government consumption. While the US economy continued to be resilient, the Federal Reserve in its December policy took a dovish stance indicating a 75bps cut in 2024 as compared to 50bps guided in the previous policy. In contrast, the European Central Bank and the Bank of England maintained the need to maintain keep interest rates at current level for an extended period. However, the benchmark 10Y yields fell sharply across the global markets, with market participants pricing in the rate cut expectations in 2024.
Nominal GDP growth at 8.7% in H1 FY24 was much lower than an average growth of 13.4% for this period in the previous 17 years, reflecting the impact of negative wholesale inflation this year. The strong expansion in the manufacturing and investment activity in the quarter gone by is reflected in robust corporate earnings, strong capex push by the Government, and revival in real estate demand. A 110bps higher GDP growth in Q2 takes the RBI’s full year forecast to 6.7% ceteris paribus. Key downside risks to the growth outlook include persistent weakness in rural demand, slowing global growth and lagged impact of past rate hikes.
RBI’s GDP growth for FY24 gets a 20bps boost:
With a 7.7% GDP growth in H1, India remains one of the fastest growing large economies in the world. The manufacturing-led upside in GDP growth in Q2 is reflected in strong corporate performance during the quarter and is likely to continue to support growth in the near-term in the light of expected margin tailwinds and robust Government expenditure. Consumption, on the other hand, may face headwinds from persistence of weak rural demand and lagged impact of past rate hikes, partly offset by strong festive demand. This, along with slowing global demand, may weigh on growth momentum in the second half. Nevertheless, the upside in GDP growth in Q2 (+110bps higher than RBI’s estimate) provides a 20bps boost to RBI’s full year estimate of 6.5%, ceteris paribus.
Industrial activity strengthened on low base
Industrial production expanded by a 16-month high of 11.7%YoY in October, albeit off a favourable base (-4.1%YoY in Oct’22), positively surprising the markets (Consensus +10% YoY). Amidst a weak global backdrop, a durable recovery in domestic consumption demand and continued momentum in investment demand remains crucial for a sustained recovery in industrial activity. While strong government spending and traction in the real estate sector, coupled with reviving corporate capex, is likely to keep investment demand robust, domestic demand, particularly rural, faces headwinds from rising food inflation, lower Kharif production and uncertainties around Rabi sowing.
India’s Manufacturing PMI remained the strongest amongst its developed and developing counterparts. (US: 49.4, UK: 47.2, China: 50.7, Eurozone: 44.2 Japan: 48.3, Indonesia: 51.7; Russia: 53.8).
Authors Tirthankar Patnaik, PhD; Prerna Singhvi, CFA; Ashiana Salian, Prosenjit Pal, Smriti Mehra, Ansh Tayal, Anand Prajapati, Shuvam Das, Isha Sinha
(To be continued)
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