Economy turning corner, acceleration seen…
The good news is, the best is yet to come…
If things are going well, you don’t hear it. That probably captures what is going on in the economy. Rural recovery can hardly match rural distress when it comes to television rating points. No one can blame you if you haven’t heard rural recovery as much as rural distress. Teething problems in GST made splashy headlines, but recovery in GST collections and stabilizing e-way bill hardly make even whispers, let alone being fodder for breaking news. So is the case with the visible signs of turnaround in capex cycle, IIP numbers and so on. After long time, one gets to feel that all cylinders at last may be coming together to fire up the economic engine.
Pickup in investment demand:
For the economy, it has been a story of chocked capex cycle for last few years. It has been running only on few cylinders (esp. consumption), while its critical capex (private investment demand) cylinder was too clogged and sputtered to lend any material support. As for the reasons, it wasn’t that difficult to decipher what was at the root of so called investment inertia during that time. Over capacity and gross under-utilization in many sectors led to sharp slow-down in the need for capacity expansion and thus causing serious slump in the investment demand. Back then, the hope was that the sustained consumption demand will eventually lead to higher utilization which in turn will lead to recovery in private investments in early 2017, if not little later. But the two successive disruptions in the form of DeMon and GST, dashed this hope with consumption and the broader economy coming under severe strain under these disruptions for the past 12 months.
Disruption to Delivery:
It is now time for payoff from these disruptions. With the imprints of DeMon fading and with GST gradually gaining traction, consumption is back with vigor, leading to recovery in gross utilization numbers across sectors. Surge in order books reported by companies in the capital goods sector and the acceleration in IIP numbers in the last 3 months are the cases in point and provide evidence to early signs of recovery in investment cycle. Add to this, the optimism on monsoon, agri growth and rural recovery. All these add up as a huge ammunition for the economy to aspire for 8%+ growth sooner, may be as early as FY20, than expected earlier.
One doesn’t need to go too far to find supporting evidence for the afore-said economic narrative than to have quick look at the latest monetary policy commentary from RBI. To quote RBI,
“Turning to the growth outlook, several factors are expected to accelerate the pace of economic activity in 2018-19. First, there are now clearer signs of revival in investment activity as reflected in the sustained expansion in capital goods production and still rising imports, albeit at a slower pace than in January. Second, global demand has been improving, which should encourage exports and boost fresh investment. On the whole, GDP growth is projected to strengthen from 6.6 per cent in 2017-18 to 7.4 per cent in 2018-19 – in the range of 7.3-7.4 per cent in H1 and 7.3-7.6 per cent in H2 – with risks evenly balanced”
Of course, there are macro risks like rising crude and hardening domestic yield including negative global cues such as rising bond yield in US and potential acceleration in fed rate hikes etc that could cause temporary uncertainties. That said, if luck favors a little, we are looking at a huge economic tailwinds and consequently robust corporate earning cycle in the coming months for India.
Markets: Macro to drift, Micro to shine?
Coming to market, in its obsession to price the political/election risk, it has barely noticed the underlying acceleration in the corporate earning cycle. Weakening macro could be another reason why markets are yet to fully price-in the growth acceleration. India had the best of macro during last three years. Falling crude, contained twin deficits (current account and fiscal), strengthening currency, moderate or falling yield etc dominated the economic narrative in these years. That luck seems to have run out now as we begin the next fiscal. Cracks have started creeping in the macro with much of above factors showing signs of reversal.
But the good news is, this macro drift is unlikely to derail the carefully crafted recovery that is underway in the micro (corporate earnings growth). While macro may be losing some of its mojo, growth in the broader economy is coming back with vengeance, giving fillip to corporate earnings growth. Early signs of recovery in the investment demand (capex cycle) couldn’t have come at a better time. Having said that, broader trend for the markets at the index level will continue to be muted given the macro challenges, while improvement in micro in terms of sharp recovery in corporate earnings will drive stock-specific movements in the market. Unlike 2017, which was a year of magical macro, 2018 will be a year of micro with stock specific sizzle steered by progressive revival in the so-far elusive earnings growth. Investors should continue to focus on stock picking and portfolio construction during this dull phase of range bound market to benefit from the eventual breakout that is likely to happen as the acceleration in the economy gathers steam.