Even as economies come to terms with the challenges posed by a post-COVID world, the rise in geo-political tensions has resulted in an unprecedented humanitarian crisis and disrupted supply chains across the globe. As a result, prices of essential commodities have witnessed rapid inflation, further exacerbating economic growth concerns for countries that are still reeling from the effects of the pandemic. In India however, there are a number of factors that are influencing investor sentiment and it is important to understand their impact on fund flows into the domestic equity markets.
Household savings at multi-year lows due to inflationary pressures
Since the onset of the ongoing Russia-Ukraine crisis, the price of West Texas Intermediate (WTI) crude oil has risen by nearly 33% to trade at multi-year highs currently. Prices for food staples like wheat spiked by more than 75% in the days following the unrest, considering that Ukraine produces nearly a fifth of world’s high-grade wheat, and still trades at near all-time highs due to supply concerns. For developing countries like India, this has put further pressure on the household savings rate that has declined to 28.2% at the end of FY2020-21 from as high as 31.7% prior to the pandemic.
V-shaped recovery in the Indian economy boosting investor appetite
Despite these macro headwinds, India recorded a stellar GDP growth rate of 8.7% in FY2021-22 and benchmark indices continue to trade well above pre-pandemic levels. Inflows through systematic investment plans or SIPs into the domestic mutual fund industry too recorded a 30% jump in the same period and indicates the growing confidence of the general public in future prospects of the Indian economy.
The government too has ramped up investments in critical nation-building sectors like road infrastructure, actively inviting local and foreign investments in the manufacturing sector as well as launching a slew of initiatives aimed at betterment of social welfare in the world’s 2nd most populous country.
As a result of this multi-pronged approach, the Consumer Confidence index has risen to a 2 year high of 71.7 in March 2022 and is indicative of improving sentiments surrounding employment, economic prospects, and household income.
India’s long-term growth prospects make current valuations attractive
A rising demographic dividend, proactive government support, an innovation-focus across industries and a growing push to establish India as a global manufacturing hub will act as tailwinds to steer the Indian economy ahead. Slated to more than treble in terms of nominal GDP from current levels, the Indian economy is projected to expand to $8.4 trillion by 2030 and in the process overtake countries like Germany and Japan to claim the position of being the world’s 3rd largest economy.
This long-term growth potential is reflected in the fact that the country received its highest Foreign Direct Investment (FDI) inflow of $83.5billion in FY2021-22, with FDI equity inflows in Manufacturing rising by 76% over the previous fiscal and marking a 23% increase in total FDI inflows over pre-COVID levels. With the country establishing a liberal and transparent policy for FDI, this trend is bound to accelerate further in the near-term thereby offering long-term equity investors investing opportunities in marquee domestic companies that will play a significant role in driving this growth ahead.
Even as the Indian economy continues to display a remarkable resilience to the short-term external challenges posed by escalating geo-political tensions, rising foreign inflows and green shoots emerging in various sectors serve to re-emphasize the country’s long-term growth prospects, Considering that the domestic benchmark indices have moderated significantly over the past few months on account of geo-political issues and global inflationary pressures, it may just be the last call for those who have abstained from domestic markets to jump onto the country’s growth bandwagon.
Mr. Raghvendra Nath, Managing Director of Ladderup Wealth Management
