Indian markets have remained resilient compared to global peers and outperformed most of them despite weak global cues. The benchmark Nifty has given excellent returns in July as well as August and despite some volatility in the current month, the index is still positive on a month-to-date basis.
A recent report by Emkay Wealth Management noted that the Indian economy is resilient and has shown strength despite weakness across the globe. The same can be seen in the equity and currency markets, the correction in the Indian benchmark indices and rupee has been quite low compared to the other EM peers, it added.
"On a closer look at the selling by overseas investors closely, it can be seen that much of it is in the large-cap space and not in the mid-cap or small-cap space. The market cap preferences may be viewed or modified accordingly. Any corrective downward movements should be utilized as opportunities to invest for the long-term portfolio," advised the brokerage.
Let's take a look at the key reasons behind India's resilience.
Volatility in the West, high energy price a challenge to growth
As per the brokerage, the international market is witnessing heightened volatility as the economies battle inflation and a high cost of living. In addition to this Europe may be in for difficult times due to the issues that are likely to crop up in connection with oil and gas supplies due to the East European situation, it stated.
Effect: While this may not be positive for the export business, those sectors or companies which may have business exposure to the external sector may be affected due to the developments, noted Emkay, adding that in the immediate term this is a major concern.
Indian economy better than peers
"India’s latest GDP data reflect a resilient and robust economy compared to any of the comparable economies in the emerging markets space. While the selling by overseas investors has been there in all the emerging markets, the extent to which the currency depreciated is also comparatively less in the case of the domestic economy," explained Emkay.
The level of economic activity is better with one of the simple signs of the level of activity moving up, however, a significant challenge for the markets in the immediate is the dwindling liquidity and the rising rates, cautioned the brokerage. This policy is to contain the inflationary pressures, which may steal the economy of its efficiency and impede growth by adversely affecting consumer demand, it warned.
Effect: Rising rates result in a higher cost of funds and may be a drag on companies that have a huge outlay on capital expenditure.
At the start of credit off take cycle
The brokerage noted that the last recorded credit growth was 18 percent, which is quite healthy given the fact that India is witnessing an uptick after half a decade of slow credit growth.
The country will be quickly moving into the festival season and it would also help promote demand and consumption, and discretionary consumption is an area that may be able to perform better, forecasts Emkay. Consumption in the fashion and apparel sector too may look good with better earnings prospects, it added.
Effect: The manufacturing sector is expected to perform well in the light of the spends by the companies and the various initiatives by the government like PLI, and also due to the opportunities presented by China plus one, and the key beneficiaries are likely to be autos, auto ancillaries, engineering companies, and specialty chemicals, stated the brokerage. Not only domestic growth but also some amount of exports growth would help manufacturing.
The brokerage believes that this is a time to be focusing on earnings quality, businesses that have strong balance sheets, leadership positions in the respective business and demonstrated & persistent business growth. Such companies will have greater stability and quality even in the face of adverse conditions, it added.