Equities have underperformed government bonds for over a decade now and yet valuations are expensive, thanks to the ever-dwindling corporate profitability which is at multi decade lows now.
While things had materially improved, we were not quite as much in the clear as financial markets had appeared to suggest. Especially risks around global politics, geopolitics and the enduring impacts of the covid-19 crisis were being ignored.
With a sharp intra-month up move off lows, Indian equities fared better amidst this volatility. The most significant domestic development was the continued intent to use the crisis to push through structural reform as the legislature passed farm bills and labour codes.
On covid, cases in India are now stabilizing albeit at a high base. People appear to be adapting to the new normal of the virus staying with us for the near future. The economy continues to reopen and this along with pent-up demand has led to continued revival in the goods sector.
Government will have to do a lot more to support the recovery. We think there are three planks to the government support specifically: ensuring capital availability through the crisis, pushing through structural reform and stimulating aggregate demand.
Preserving medium term growth potential of 7% plus is not just important but perhaps the only solution to our macro challenges and the best response to geopolitical tensions too. In a country where a large part of the population including many northern states and large parts of rural areas have a per capita GDP of less than US$ 1000, we should not fall for the ‘5% is the new normal’ narrative.
Else, not only will macro problems get exacerbated, we will invite serious challenges with regards to social tensions as well.
Globally, a potential reflation could provide an important tailwind. The current crisis will entail a more expansionary fiscal policy by the US and other major economies, which should help an economic reflation. This should be positive for global growth and EMs like India. At a time when China is losing trust, the global geopolitical re-alignment should work in India’s favour.
Our favourable demographics, large local market, strong democratic institutions, trust and continued focus on structural reform augur well. But above all, our ambition for high growth and a credible roadmap towards it will be very critical to act as the magnet to keep the world interested in us.
Trend towards digitalization is coming at the opportune juncture for India. We missed the bus on manufacturing but we may have natural advantages on digital owing to a large and diverse population, which serves as a source for rich data and allows scale benefit.
Eventually our success in the global economy will depend on creating absorption capacity through focus on scale, smart infrastructure, improving ease of doing business, ensuring contract sanctity, reforming factors of production and fostering innovation.
A sustained expansion on the back of right ambition and execution is critical for turning the tide in equities’ favour over the next decade. We must reiterate, even with return of high structural growth, the winners will still be very different, just as they were post the reforms of the early 1990s, with resilience and innovation even more vital now!
Navneet Munot is the CIO at SBI MF. The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.