Current Trends and Future Outlook of Indian and Global Markets

Global markets have been through a rather testing period in 2022. The year began with the RussiaUkraine war taking a turn for the worse followed by the sanctions on Russia. The global shortage of oil and minerals caused by the sanctions on Russia triggered a surge in global inflation. In response, central banks ranging from the US Fed to the Bank of England, ECB, and India’s RBI went on a tightening spree. Interest rates were hiked sharply to curb inflation. 

Here is a quick look at how the major indices in the world stack up compared to their yearly highs and lows.

What are the quick inferences we can draw from the above table? Firstly, the damage is deep and sustained only in the NASDAQ and the Hang Seng. That is not too hard to fathom. The NASDAQ is an index of technology and new-age companies and these have seen big value erosion amidst fears of a global slowdown. Also, the strong dollar has worked against them, which explains why the NASDAQ is over 29 per cent lower than last year. The other big fall is in Hang Seng, which is a proxy for Chinese markets. The 28 per cent fall in this index is due to the problems in China in terms of slower growth, coupled with COVID lockdowns. 

Amidst this chaos that had overtaken global markets, there were several global headwinds. For instance, the geopolitical situation remained grim, Chinese growth was the missing link, central banks were tightening and inflation was not reacting in a hurry. There were persistent warnings from academicians and economists about a likely recession in the US, UK, and the EU. Despite these headwinds, the Indian markets have given more than 5 per cent returns over the last year and are close to the yearly highs. Is that an indication of the shape of things to come? Can that be construed as a signal of strength?

Five interesting trends visible in India

Before we venture to answer whether the portents are good for Indian markets, let us look at 5 interesting trends. 

■ India's inflation is reacting to rate hikes. CPI inflation may have fallen just over 100 bps but WPI inflation has fallen over 800 bps from the recent peak. Normally, WPI is the lead indicator for CPI inflation.

■ Despite having hiked the rates by only 190 bps, the RBI can claim that the real interest rates in India are higher than in the US. Indian 10-year bonds have 7.2 per cent yields with 6.7 per cent inflation. US bonds have a 3.80 per cent yield with 7.7 per cent consumer inflation.

■ FPI flows have made a comeback. After FPIs took out USD 34 billion between October 2021 and June 2022, they infused USD 6.4 billion in August. FPIs were neutral in September and         October but in November have infused over USD 2.5 billion.

■ At a time when financial services companies are struggling globally, in Q2FY23, BFSI companies accounted for a whopping 42 per cent of the total net profits of India Inc.BFSI profits surged 38 per cent YoY in the second quarter.

Even the most strident critics of the Indian story admit Indian economy would grow by around 7 per cent in 2022.  That is a full 400 bps higher than China and leaves India as the only rapidly growing large economy in the world.   

As inflation eases, the dollar index will ease too

What could lead to the easing of inflation? The very factors that led to high inflation will now result in inflation tapering. In the last two years, the spike in inflation was driven primarily by two factors. Firstly, in the aftermath of COVID-19, production failed to keep pace with demand growth. This resulted in supply shortages and a severe supply chain crisis. Microchips were a classic example. The situation was worsened by Chinese aggression in COVID control as China continues to be a key link in global supply chains. 

The second trigger for inflation had been too much liquidity sloshing around. It had resulted in higher wages and as we have seen in the US labour data, the wages are just not coming down as the demand for workers is far more than the supply. Hence, despite tighter rates, there is still slack in the economy pushing up inflation. Now both are changing and they are changing for the better. Hence inflation is more likely to come down. As inflation comes down, especially in the US, the singular outcome will be the tapering of the Dollar Index. 

The Bloomberg Dollar Index (DXY) is an index of dollar value against a basket of hard currencies. That index had recently shot up to a 22-year high of above 110 levels. From there it started retracing. A good way to assess this factor is to look at how the Dollar Index has interacted with the Nifty over five years. What the above chart shows is that while the relationship



between the Nifty index and the Dollar index has been largely inverse, the more important point is how they behave around the turning points. Normally a sharp fall in the dollar index is accompanied by a spike in the Nifty and a sharp spike in the Dollar index is followed by a fall in the Nifty. The relationship is most prominent at the turning points. With the dollar index having retraced from its peak and inflation likely to come down further, it can be a force multiplier for the Nifty. 

Journey to a USD 5 trillion economy and beyond 

A recent report by Morgan Stanley highlighted that India would scale a GDP level of USD 5 trillion by the year 2027 and touch USD 8 trillion by the year 2032. That is still a long way off and we need to be rightfully cautious about very long-term projections. However, what we cannot dispute is that the journey from the current GDP of USD 3.4 trillion to USD 5 trillion, is just waiting to happen. This should have happened earlier but was delayed due to COVID. If India has to overtake Germany and Japan in the next 10 years, what could be the big drivers? 

3 Ps of the future – Policy, Production, and Positioning 

Investors often wonder; if India has to achieve these lofty goals and the Indian markets have to create multibaggers, what will be the drivers?

■ We must look at the Indian policy approach at 2 levels. Firstly, India has redeemed itself in front of the world by handling the COVID crisis admirably, despite lacking the resources of      better- endowed Western friends. Policymaking also refers to the willingness that the government has shown to listen to new ideas and be supportive of business.

■ The second P refers to production or the gradual shift in the Indian economy from being a service-driven economy to a production-driven economy. What India achieved in two-wheelers, it is now trying to replicate in other sectors, helped largely by supportive policies like the government’s production-linked incentives (PLI) and Make in India.

■ Finally, positioning is about how India sees her role. For a start, the big trend in the next few years could be India taking a big chunk of the manufacturing burden of the world. It has just     started in electronics, cars, defence, and microchips and could spread to many more areas. India sees itself as the manufacturing centre of choice as global manufacturers are looking to  diversify their outsourcing basket.   

What does this mean for wealth creation? 

Let us look at some basic numbers. If the Indian economy has to transition from a USD 3.4 trillion economy to a USD 5 trillion economy in 5 years, we are talking of market cap accretion of around USD 2 trillion or higher in five years. That is just a passive opportunity. The production shifts and the consumption impact of the GDP accretion will also have a multiplier effect.

The moral of the story is that fundamentally, Indian markets are sitting on a cusp of a multi-trillion-dollar opportunity. At a momentum level, inflation, interest rates, and the dollar index are all favouring the Nifty to move upwards. Whatever the index levels, the wealth impact is going to be humongous in the next five years.