China has snatched global attention away from Greece and maybe that’s a good thing. Just for sheer size, China makes Greece look tiny. But both make India look good. We just have an industrial slowdown, entrenched corruption, zombie sectors like public sector banks and real estate and a potential threat from drought. Ok, but seriously: at least our stock markets are up 2.6% in the past month, our economy is growing well (7.4% in FY15, controversies apart on the new series) and inflation seems to be under control (Consumer Price Index up five per cent in April 2015). Suddenly, we don’t look too bad, compared to China and Greece and this is being reflected in the Indian Rupee remaining stable at Rs 63-64 to a dollar in the first quarter of 2015-16.
The good, bad and ugly of the Indian economy
And then again, if you need crises to make yourself look good, then we must be living in desperate times. For India’s story is far more rock solid. We’re ambling along. Trying to balance ourselves between the good and the bad and steering clear off the ugly.
The good: As India veteran, Akash Prakash pointed out in a Business Standard column: optimism and delivery on Government reforms, roads build-out gathering pace in FY16 (to 10,000 km v/s 6,000 km in FY15), buzz in e-commerce, etc. As mentioned above, inflation appears to be under control even though this is being helped by global factors like the fall in crude prices. More recently as Sajid Chinoy of JP Morgan, notes in another Business Standard column –capital goods production and commercial vehicle sales are staging a rebound of sorts and the road build-out is being backed by an increase in orders.
The bad: Corporate profitability is in bad shape. Net sales of 1,700 Indian companies (ex-oil) grew at 5.9%, a two-year low, while net profits fell 7.4% in FY14-15. This alone questions the validity of the 7.4% GDP growth number for FY15 but that is a separate topic. The large and important sector of real estate is in a self-inflicted crisis, stuck with large, costly inventory and near zero demand. Rural India is bearing the brunt of wage growth falling off earlier highs and a potential drought threatens to make things worse.
The ugly: The non-performing assets (NPA) crisis at India’s banking sector, specifically with Public Sector Banks. In its recent Financial Stability Report, the Reserve Bank of India (RBI) said “While leverage has increased, the ability to repay debt (solvency ratio) and debt servicing ability (interest coverage ratio) of the corporates has declined”. The crisis is particularly acute with Public Sector Banks on which, the RBI said “The continued stress on asset quality of public sector banks and consequent pressure on capital adequacy is a matter of increasing concern”.
The bull market will resume after this break
But enough of the gloom and doom. Everyone knows that India is in a bull market, nearly doubling in about three years (from a 2012 low of 4637 to a 205 high of 8996 on the Nifty on a closing basis).
The recent correction from March to June appears to be over with the Nifty already covering up half of the loss. More importantly, mutual fund inflows recently crossed foreign institutional investors – an unheard of phenomenon.
Indeed, equity mutual fund schemes saw inflows of Rs123bn (US$1.9bn) in June 2015 – the highest since the bull market of early 2008. And if you need proof that we are risk off mode, the CNX Midcap Index (+5%) has trumped the CNX Nifty (+2.5%) in the past month. India’s outlook – despite all the problems – remains broadly positive with the economic cycle set to recover from the recent slowdown.
For the 1st time, MF monthly inflow overtakes FII net inflow. Something market have been dreaming for 2 decades pic.twitter.com/4iXNIZGyeg— Moneylife Savers (@MoneylifeSavers) July 4, 2015
What does this mean for you? Simple. If you’ve resisted investing in equities, wake up. If you’re already invested, line up some more money. No one really knows when and how the crises in China and Greece get resolved. Anything ugly can cause panic-led foreign outflows that domestic funds might not fully compensate for. But this will only create seriously good opportunities to add on to your portfolio.
Anupam Gupta is a Chartered Accountant and has worked in Institutional Equity Research since 2000, first as an analyst and now as a consultant.
He tweets as @b50