Nifty may continue to outperform despite US recession concern

·         India’s Nifty is supported by earnings growth, policy & macro stability and thus enjoying EM scarcity premium despite some political risk in the coming years

India’s benchmark stock index Nifty gained almost 20% in 2023 and 55% in the last three years (2021-23) supported by solid earnings (EPS) growth of around 25% on average. The Nifty EPS (consolidated) was around INR 414 in FY18 and INR 1051 in FY24. Nifty EPS also grew around +22.49% in FY24, while the Nifty index grew almost +15% in 2024 till last week, when it made a new life time high around 25078 on 1st Aug’24 on positive global cues amid hopes & hypes of an early Fed rate cut from Sep’24 (instead Dec’24) after Fed meeting (31st July).

Thus Nifty jumped almost +70% from Jan’21 to July ’24. In the last three years, India’s Nifty-50 gained almost +51% (till July 24), against comparable global index DJ-30 (US) +15%, DAX-40 (Germany) +15%, CAC-40 (France) +10%, Euro Stoxx-50 (EU) +15%, Nikkei-225 (Japan) +33% and China A50 index -24%. Nifty has outperformed all major, developed & comparable stock markets significantly in the last few years supported by not only India’s upbeat economic/GDP growth but also Nifty earnings/EPS growths and Modinomics optimism.

Indian market enjoys a scarcity premium in the EM universe. In the last ten years, Nifty was boosted by India’s political & policy stability (Parliamentary majority) and the attraction of Modinomics and 6D (demand, development, demography, deregulation, digitalization, and democracy), a rare combination in the EM universe.

Indian PM Modi’s mantra of reform, perform & transform with a focus on ease of doing business, abolition of age-old numerous unnecessary/irrelevant regulations/laws/rules, and policy predictability/stability has converted India from a fragile five to one of the fastest & largest economies in the G20 space; now world’s 5th largest economy and may soon become the 3rd largest economy in the world, surpassing Germany and Japan. In terms of market capitalization, India is now the world’s 3rd largest around $6T after the US (~$54T) and China (~$9T), surpassing Japan and HK. Indian economy and the stock market were supported by Modinomics; i.e. corporate tax cuts, deregulations, and infra/fiscal stimulus along with targeted monetary stimulus and ‘helicopter money’ (direct cash transfer to a certain section of the society), which has also boosted consumer spending to some extent.

India’s Fiscal Policy: Employing huge infra CAPEX along with targeted (small) social security grants/subsidies, ensuring proper fiscal balance

India is now employing huge infra stimulus, especially in Railways/transport and also social infra (public hospitals, schools etc.). Indian Federal Government is employing around Rs.10T CAPEX in FY24, while various state governments are also spending an equivalent amount of around Rs.8T for the same, thanks to growing indirect and direct tax collection due to various tax reforms measures being undertaken (like GST), ensuring higher compliances. India’s total infra CAPEX (Federal + States) for FY24 is around Rs.18.20T, almost 6% of nominal GDP against 4.5% on average for the last few years. Looking ahead, India may employ more infra CAPEX around 10% of nominal GDP to cope with growing demand/population.

India’s fiscal deficit is now around 6% of nominal GDP against a target of 3.5%. India’s public debt interest is now around 3.5% of nominal GDP, while 45% of core operating tax revenue, is a red mark for higher sovereign ratings. But India is now also improving its core tax revenue more than growth in nominal GDP, while trying to reduce structurally elevated debt, which was around INR 246.18T (Federal + State governments combined), above 83% of nominal GDP. This is a red flag.

But India’s external debt of around INR 9.02T (~$108B) is insignificant compared to overall core tax revenue, FX reserve and nominal GDP, which is very rare when compared to comparable EMs. This along with the partially convertible currency status of INR (only in current account with prior RBI approval for import/export and certain other reasons), India is practically insured from any adverse global FX movement. Indian citizens are not allowed to buy FX like USD in the open market and thus are largely insulated from any external FX appreciation shock on its external debt (unlike Turkey, Argentina, etc.).

USDINR has limited upside potential:

India’s potential to grow around 7% to 10% on average (real GDP), along with controlled core inflation of around 4% and very little external/FX vulnerability (limited/predictable currency depreciation) is positive for the economy. Looking ahead, there may be limited depreciation risk of INR (against USD) due to stable macros, higher FPI/FDI inflows, thrust on local manufacturing, stable/lower prices of global oil, increasing EV adaptation, and political/policy stability.

Also, the Indian sovereign bond is expected to see higher inflows due to inclusion in the JPM global bond index and RBI is expected to follow Fed or even sounded less dovish than Fed (in rate cut moves) in the coming days. Thus USDINR, which is now trading around 83, may not break 85-90 levels in FY: 24-25 even after the recent Indian general election, which resulted in a weak Modi 3.0/NDA 3.0 (coalition government; Modi/BJP failed to gain simple majority)

In 1970, USDINR was around 7.50; in 1990 was around 17.50, and now in 2024 around 83.00, while USDCNY (China) was around 2.50, 5.00, and now around 7.20. The huge depreciation of the local currency (INR) caused higher imported inflation, higher cost of living, and higher borrowing costs; India imports almost 85% of its oil/fuel but is independent of food. If we consider both goods & service exports along with solid remittances from NRIs, India has a comfortable BOP (balance of payment) position. 

Geopolitics:

In India, till recently Modi was seen as the ‘Godfather’; despite a recent election setback, Modi is still the world’s most popular and one of the most influential global political leaders with an autocratic nature

Modi’s autocratic political leadership model along with inclusive development with an anti-corruption, nationalistic & Hindutva image has made him the most popular political leader in recent times not only in India but also all over the world. Also after the COVID fiasco, India is now being seen as a reliable friendly supplier/partner country of many developed nations (West). In addition, India under Modi is now able to play on its terms (interests) due to growing economic, military, and geopolitical influence. Modi/India is now playing both sides of geopolitics, keeping its interest at the forefront without any significant compromise. Thus India is also able to bypass all US/G7 restrictions to import ‘cheap’ Russian oil (at a heavy discount) and export the ‘clean’ refined gasoline/diesel from the same ‘polluted’ oil to Europe/EU (like ‘washing machine’).

Now India may also allow Chinese citizens/experts to work on certain Indian projects (like infra/transport, manufacturing, etc). India is now seeing China as a ‘big brother competitor’ and aspiring to match China’s spectacular rapid development in the mid-90s, especially in infra/transport/high speed/semi-high speed railways. India is now competing or trying to match in the development of border infra along the Chinese border apart from roads, railways, airports, etc across the country. Modi believes that two neighbors (India) should engage in a ‘war of development’ (infra creations) rather than a ‘war of missiles’.

India is now democratically following the Chinese model of development:

Modi admin also believes that spending money through infra stimulus is far better than ‘helicopter money’ (direct/indirect subsidy/grants) as the former will boost GDP by almost three times against 0.95 times for the latter. Thus, since COVID-20, India has been spending huge in infra along with limited/targeted social security spending (direct/indirect grants) unlike many AEs (U.S./Europe).

India’s policy, macro, and currency stability is a rare case among comparable EMs (except China) and thus India enjoys a scarcity premium; FPIs are scrambling to buy quality Indian blue chip companies, that have good earnings growths, sustainable profitable business models, excellent corporate governance, impeccable management, and deleveraged balance sheet. Also, relatively higher USDINR is good for export-heavy Nifty as almost 60% of earnings come from exports led by RIL, INFY, TCS, etc.

Moreover, India’s banks & financials have enjoyed good/robust NIM/NII due to elevated bond yields and various government/regulatory policies including the effective implementation of IBC. India’s Federal government is the promoter/majority shareholder of all PSU banks and thus also enjoys higher dividends from these banks, which are also the largest holders of GSECs (Indian government bonds). Thus FPIs/DIIs/Angel Investors/HNIs/Retailers are all flocking to the Indian stock market, even after some setbacks of Modi in the recent general election. There is FOMO (fear of missing out) like sentiment among investors to board the Indian ‘growth bullet train’.

India’s Monetary Policy: Calibrated policy action with limited/targeted Liquidity adjustment (not unlimited QE/helicopter money):

RBI may start cutting rates from Dec’24-Feb’25 if the Fed starts the same from Sep-Dec’24. RBI may cut -25 bps each in 10 QTRs against the Fed’s 11 QTRs for a repo rate of +4.00% against the Fed’s +2.75% in the longer run (By H1CY27). Although India’s headline inflation (CPI) is quite elevated and sticky around +5.0% due to elevated food inflation (around +10%), without food and fuel, India’s core inflation is now hovering around +3.0% on average, below +4.0% targets.

India’s core inflation data is not official, but derived; in any way, the current divergent trend between total CPI and core CPI may also indicate subdued core demand/discretionary consumer spending. Overall, India’s real GDP is now growing around pre-COVID trend levels of around +8.0%, while total/headline inflation (CPI) has been running around +5.5% and core inflation (core CPI) has been around +4.0% for the last two years on average, while the average unemployment rate remains around 8.0%. Overall, due to the huge population burden, significant income inequality, and lack of appropriate labor/wage reform (like a respectable minimum wage), India is also suffering from K-shaped economic prosperity and jobless growth to some extent.

Overall, despite incremental improvements in the last few decades, India is still far behind China in terms of infra (traditional, transport, and also social). Thus there is a huge scope for improvement for India’s ailing infra, especially railways and also education & healthcare to match with growing/huge demand for a huge/still growing population of almost 1.50B of the country. India’s long waiting lists (3-4 months) for train tickets in the busy traveling/holiday season has still been a big issue for the last few decades indicating that transport infra is still significantly inadequate to the growing middle-class demand; the same is now also almost true for airways.

India has now a natural economic growth of around 7-8% (real GDP) due to its large population and growing affluent middle class along with huge/growing government spending and service/IT/petroleum products exports. But India needs to grow in double digits (at least 10-12%) in real terms keeping USDINR and core inflation at manageable levels for the next 15 years to be able to become a true $5T economy with inclusive growths; not exclusive and jobless growths like at present. India needs to put proper tax and policy structures in place to encourage domestic manufacturing of quality goods for export so that it can compete with China and other Southeast Asian exports, which will eventually create mass employment (like in China).

India has to fund the requirement of huge deficit spending in various ways including higher revenue from tax and also sales of PSU assets/companies, while taking moderate debt. For that there is a need for political partisan not only between the two main political parties BJP and INC but also among various regional political parties to fund deficit spending as there is limited scope for further incremental debt; too much debt, even in LCU (Local Currency Unit) may mean higher money printing/higher liquidity and negative for the economy. Thus there is a need for political/economic consensus among not only the two main political parties in India (BJP-INC) but also among various regional parties in various states across India, as India is a union of states and states have to push/implement various policies and reforms designed by the Federal government.

Looking ahead, coalition government/politics will be more prominent and the reality in the coming days/years in the absence of Modi or even under a weak Modi, a decisive autocratic leader. Also, BJP’s parent organization RSS does not want any person/leader’s image bigger than the party and thus is not backing Modi now actively due to his apparent arrogant and autocratic nature. Thus moderate Gadkari may be an ideal person for RSS/BJP to be the next PM candidate after Modi.

The Indian market has enjoyed the ‘Modi’ premium for the last 10 years due to political and policy stability, although despite a brutal majority/huge political mandate, Modi was only able to bring incremental rather than monumental policy reforms on the economy and some other aspects. Also, the pace of PSU disinvestments has slowed significantly in recent years, while India desperately needs additional fund support for growing deficit spending, especially for traditional infra and social infra to increase the overall supply capacity of the economy to match growing population/growing demand and ensure price stability. Modi was unable to bring any monumental real policy reform required for the economy like land and labor reform.

However, Modi was very successful in the implementation/execution of various policies that were already introduced by previous UPA/Cong admins. Modi also promised ‘big political reforms’, which is the need for the day to resolve the huge crisis of unemployment and inflation in the country.

In the coming days, the ‘Modi’ premium for the Indian market may reduce due to political and policy uncertainty amid the compulsion of coalition politics, but the EM scarcity premium may remain intact by & large due to India’s proven macro stability in the last two decades amid broader policy consensus, be it NDA or UPA in charge of the country. India’s attraction to 6D ((development, demand, democracy, demography, deregulation, and digitalization) is a prime driver of India’s EM scarcity premium. Even 20% of the Indian middle class (around 300M) is equivalent to the whole US middle-class population, having significant discretionary consumer spending capacities.

Practically, both BJP and Cong, two major political parties in India maintain a cohesive/bipartisan/multi-partisan economic policy (like Democrats and Republicans in the US) despite divergent political views/ideology. India is a big and lucrative market in the world, going for 3rd largest in the coming years irrespective of Modinomics, Gadkarinomics, or even Gandhinomics; it’s a simple arithmetic eventuality now irrespective of any political narrative.

The Indian economy grew incrementally from 1995-2000 after the monumental economic reform initiated by Narasimha Rao/Manmohan Singh (PM/FM) government (INC), which was subsequently carried forward by both BJP and CONG/INC governments (NDA-UPA) with varying political narratives; but there was a broad macro-stability over the last 25 years.

India needs now GST tax reform without frequent changes in rates and multiple slabs. As revenue revenue-neutral, simple indirect tax model, India should apply a 15% or even 10% uniform GST rate across all products and services including petroleum products. India’s CII has prescribed three slabs/rates for GST with the inclusion of petroleum products.

India also needs out-of-the-box ideas or monumental reforms in various aspects (rather than a mere political narrative) for a developed economy by 2047-50 or even by 2100. India also has to strengthen institutional autonomy in the judiciary, press, election commission, competition commission, etc along with political funding and electoral process reform.

Fundamental Valuation: Nifty

Nifty EPS grew by around +22% in FY24 and by 15-20% on an average in FY: 25-30

After the recent correction on 5th Aug’24 (black Monday), Nifty is now trading around 24000 levels with TTM EPS (FY24) around 1051 and a decent PE around 23; looking ahead assuming an average CAGR of 15% in EPS (against 7-8% real GDP growths) and 20 fair PE, the fair valuation of Nifty may be around 24200 by Dec’24; 27850 by Dec’25 and 32030 by Dec’26; i.e. Nifty is now trading around projected fair value of FY25 assuming EPS around 1209 (~15% growth from FY24 levels; although it may be +20% for various factors. Nifty earnings growth may be boosted by RBI/Fed rate cuts (lower borrowing costs), huge thrust on infra spending, possible GST/income/corporate tax rate cuts, lower oil prices, adequate pricing power by producers, increasing government spending and also private capex coupled with higher USDINR, positive for export heavy Nifty earnings.

Despite there being a huge difference between India and China (democracy & autocracy), India needs to compete/follow the Chinese model in public infra (traditional/transportation/social) and agriculture with a feasible PPP model. India’s Modi admin is now trying to compete/copy some of the feasible China models in the creation of modern infra (both transport and social), manufacturing, and service sectors, so that by 2047; i.e. 100 years from 1947 independence from British Rule, India may be called as a developed nation, not developing.

India is now targeting to become a $5T economy (nominal GDP), 3rd largest from the present $3.50T by 2030 mainly through infra stimulus, manufacturing, and servicing activities. For this Indian economy has to grow around 15% CAGR (nominal GDP) for the next 5 years. India has also a great potential/hub for travel & tourism, especially religious/spiritual tourism, attracting more than 2B tourists annually despite various infra deficiencies.

India now has a robust and improved tax collection system due to digitalization & effective implementation of GST, higher rates of GST (sales tax), high fuel tax, and reasonable/competitive personal and corporate/business tax rates coupled with improved collection/compliance system. Thus India is employing huge fiscal stimulus in creating infra, which is boosting GDP around 3 times, even after targeted social security grants (dole money), which is boosting GDP by 0.95 times (indirect boost to consumer spending).

India’s growing affluent middle class (20% of the population~300M) supported by government and big corporate employees (good salary earners), YouTubers, and the stock market /real estate boom is ensuring steady growth in consumer spending despite a huge 80% of the population still under poverty line amid growing income inequality. India’s 300M affluent middle-class people are equivalent to the US population of around 350M and the main driver of the Indian consumption story.

Conclusions:

India’s PM Modi may not be comfortable with coalition politics, falling popularity, and internal conflict within BJP/RSS over his arrogance and autocratic behavior. Thus if Modi can’t consolidate his power after the recent election setback, he may have no other option but to opt for a face-saving early exit from active electoral politics by Dec’25 or even before on BJP’s 75-year mandatory retirement policy; in that scenario, RSS backed moderate Gadkari may be the next PM candidate for BJP and the original theme of so-called Modinomics (reform & perform) will continue, even may be in different form & style for the time being.

The Indian market is still discounting a comfortable Modi 3.0 and hopes for a continuation of Modinomics. No doubt Modi is a great political leader (45 years of experience) with an autocratic nature and strong personality and also a great administrator. PM Modi has total control over admin/bureaucrats; this was in sharp contrast to previous UPA/INC/Singh admin when there were dual power centers (PMO-Cong HQ); Modi has also kept RSS interference at arms-length/out of PMO.

Against Modi’s ‘godfather’ like image, political maturity, and personality, the main opposition leader Rahul Gandhi is still far behind despite significant improvement in the last few months. India’s current growth story may be too much ‘Modi’ savvy (one-man narrative), and there is a perpetual risk after his absence/early retirement. But BJP is also a cadre-based professional political party along with various credible faces (like Gadkari) for the next leader after Modi. Even under a Cong-led (IND) government, the Indian growth story may remain unaffected as records show no major differences in economic performances between the UPA (2004-14) and NDA (2014-24) era. It’s now an arithmetical eventuality that India becomes the 3rd largest economy ($5T nominal GDP) in the world in the coming years surpassing Germany and Japan with or without PM Modi.

India is a big and lucrative market in the world, going for 3rd largest in the coming years irrespective of Modinomics, Gadkarinomics, or even Gandhinomics. In his election speech, Rahul Gandhi of INC called for GST reforms including a lower single tax regime for all goods & services; i.e. the main theme of Modinomics (reform & performance to ensure ease of business) may continue even after Modi. Thus any sharp correction even after any early exit of Modi 3.0 may be a wonderful opportunity to buy the Indian growth story at a deep discount as valuation is being supported by solid earnings growth irrespective of any political narrative.

India’s Dalal Street (stock market) is vibrant and one of the best-performing markets in the world, now competing with China Japan, and the US amid growing weightage in the MSCI index and more global fund allocation. India enjoys higher PE (premiums) over China because of higher EPS growths in the last ten years (almost double 10% vs 5%). Indian stock market is now also not dependent on FPIs amid robust inflows from DIIs and retail/HNI investors (domestic).

But Indian regulators are now also tightening various rules & regulations including higher trading costs to curb excessive speculations by retail traders in India’s derivative (FNO) market, which is one of the largest in the world. In that sense, it may be beneficial for such retail traders to avail trading/investing services from platforms like iFOREX, where Nifty, Bank Nifty, and certain other Indian blue-chip stocks are available as CFDs; traders may enjoy both sides of trading (long/short) as per their financial capacity as CFDs lots are available from 0.10 lots, with small margin money requirements, which is a great advantage in comparison to Indian brokerage houses.

Market impact:

In line with the recent global/US meltdown, India’s Nifty also corrected almost -1200 points from 25077 to 23895 amid negative global cues (concern of US hard landing after terrible July jobs report), political/social unrest in neighboring Bangladesh, and sudden appreciation of Yen due to active BOJ intervention (affecting Yen carry trade and startup capital). Nifty soared from 24000 levels to 25000 in the last few weeks after India’s Federal budget (FY25) was seen as growth boosting due to various reforms including the abolition of the Angel tax (for startups).

Technical trading levels: Nifty Future

Whatever may be the narrative, technically Nifty Future/ India 50 CFD (24045) now has to sustain over 24700/24950*-25050/25200* for any further rally to 25500-26000* levels in the coming days; otherwise sustaining below 24650/24500-24400/24300* may further fall to 24000/23800* and 23600*/23400-23300*/23000 and further to 22800/22600*-22300/21800/21300* and further to 21150/21000*-20400/20000* in the coming days.

Bottom line:

If Indian policymakers can keep the right policies in place to grow the economy double-digit by keeping inflation and currency under control, India may be the ‘next China’ by 2050-60. Despite being one of the fastest-growing economies in the G20 space, India remains lowest in terms of GDP/Capita simply because of its huge population and K-shaped economic prosperity. Thus there is a huge scope for improvement to compete with China in the coming years so that India can increase its economic/labor productivity and price stability, which is the ultimate