Indian economy in a Goldilocks phase: Motilal Oswal Private Wealth
-Key triggers are GDP growth at 7%
– Inflation at 4.5%
-Fiscal & Current Account Deficit (Twin Deficit) at 6%
According to Alpha Strategist September 2024 report by Motilal Oswal Private Wealth (MOPW), India’s economy has witnessed all phases. In FY13, India was considered a fragile economy due to low GDP growth of 5.5%, high inflation at 10%, and alarming twin deficit at 10% of GDP. By FY17, the economy has not just recovered but was also in an expansion phase with GDP growth at 8%, Inflation at 5%, and twin deficit at 4%. Subsequently, the economy went into a slowdown post the NBFC crisis in 2018-19 and hit a trough during the pandemic in FY21. Post recovery and a phase of stability over the last couple of years, the economy is now in a Goldilocks phase where GDP growth is 7%, Inflation is a reasonable 4.5%, and twin deficit is well managed at 6% of GDP.
India’s forex reserves have steadily risen over the last couple of years and are at a high of USD 680 bn. A well-managed current account during this period has ensured that the INR has also remained stable in a narrow range.
Along with the economy, the domestic equity market has remained quite resilient during global events. While corporate earnings have been the major driver for stock market performance over the last three years, the other key driver has been domestic institutional investors (DIIs). Post CY21 till date, the net inflows from DIIs has been USD 90 bn, nearly 10x the inflows from foreign institutional investors (FIIs) during the same period. Retail participation and Financialization of Savings are structural megatrends which are likely to support domestic equities over the next several years.
In terms of valuations Large Caps remain fairly valued while Mid & Small caps on aggregate are relatively far more expensive. However, in terms of earnings growth expectation over the next couple of years, consensus estimates suggest higher growth for Mid & Small caps over large caps. Sector rotation is likely to continue. MOPW suggests adopting a staggered investment approach over 3-6 months for Large cap & Multicap strategies. For select Mid & Small cap strategies, investments should be staggered over the next 6-12 months.
