The Indian Slowdown
While the long-term fundamentals remain attractive, the high valuation of the Indian market and a rather notable slowdown in economic activities will impact stock market performance.
The bull case for India is there are multiple drivers for underlying economic growth. The country had gone through 10 years of economic reform under the current government. It took the banking system just as long to recover from the last capital expenditure boom bust cycle. In addition, it is seen as the rising power, which can adroitly navigate the geopolitical tug-of-war, and is seen as of strategic importance to both camps.
In recent months, there are clear signs that the economy is suddenly slowing down after several years of strength post-COVID. We are seeing weak of loan growth amongst banks, a worsening credit cycle in the credit card and micro-finance sectors. The sudden slowdown in economic activity caught many companies unaware. Almost 50% of companies in the market missed their quarterly earnings recently. On average, they were expected to grow earnings 9% from a year prior, but many companies reported barely flat earnings. Furthermore, many sectors were caught up, including autos, consumer stables, power generators.
Truth is Indian consumers have now exhausted their excess savings accumulated during COVID. Similar to other economies, urban consumers in India are squeezed by higher cost of living, such as rental and slowing wage growth. This round of consumption slow down coincides with tighter spending discipline by the government, as well as higher interest rate. As inflation is currently running “hot”, chances of a rate cuts have diminished.
Despite macro-economic uncertainty, valuation of the market remains expensive. Below is mid-cap price-to-earnings multiples in different periods. With growth slowing down, the sky-high valuation will likely not be sustainable.
Last, but not least, the volume of IPOs and equity raising in India is surging. A plethora of IPOs marked the top of markets historically.
At Ox Capital, we are focused on quality companies with long term growth which are available at inexpensive valuations across emerging markets. Current valuations are providing lots of interesting opportunities. Let us know if you would like to understand specifically where we are finding the opportunities!
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