Investment in Stocks to Resume as Economy Reopens

Rural consumption has demonstrated resilience among major growth drivers, whereas urban consumption is flat

Investment in Stocks to Resume as Economy Reopens
Investment in Stocks to Resume as Economy Reopens
Anand Radhakrishnan - 27 August 2021

A gradual resumption in economic activities post the relaxation in restrictions is indicated by improving mobility indicators. With the reopening of the economy, a resurgence in pent-up demand could offer immediate support to growth. Among key growth drivers, rural segment consumption has shown resilience whereas urban consumption trend remains relatively muted. Gross capital formation is presently being led by government spending. Private capex growth revival could likely be more gradual. The ongoing pace of vaccination drive in the country and potential approval and availability of new vaccine candidates during the rest of the year are key positives. Along with an overall conducive policy mix, a continuation of an accommodative stance by the monetary policy committee (MPC) of the Reserve Bank of India (RBI) and commitment to prioritise growth, despite inflationary pressures in the economy could aid cyclical growth recovery.

As improvements in industrial indicators and external demand are unfolding, the economic activities could potentially normalise from September onwards supported by pent-up demand, ongoing vaccination drive (current pace stands at approximately 40 lakh per day), support from policy mix, and resurgence in global growth (to boost exports growth). Cyclical recovery could aid domestic GDP growth for FY22. The monetary policy stance remains supportive of growth.

Factors on the external front also remain positive. Global trade volumes show a V-shaped bounce-back. The uptrend in aggregate world manufacturing PMI level and the surge in commodity prices point at recovering global demand. The global economy is projected to grow at 6.0 per cent in 2021 and 4.9 per cent in 2022 by the IMF in its July outlook. The growth forecast is revised upwards for advanced economies whereas it has been marked down for Asian emerging economies for 2021. These changes are reflective of the pandemic developments and policy changes implemented in these economies. India is projected to grow at 9.5 per cent in 2021 (3 per cent below the April 2021 IMF forecast).

Risks to the domestic economy emanate from a patchy trend in monsoon and a slow pickup in sowing in this season so far. On the global front, despite the encouraging economic growth numbers in the US, the US Federal Reserve seeks additional improvement in the economy including the labour market to be able to decide on the tapering of the stimulus program. The US central bank acknowledges inflationary risk but views it to be transitory. A potential risk could emerge from slower-than-expected vaccine rollout /uneven recovery and new virus variants, faster than anticipated pace of inflation, especially commodity price inflation, warranting policy action whereby worse pandemic dynamics and tighter financial conditions could impact recovery in emerging markets.

Stimulus reversion by the US Federal Reserve and its potential impact on global market sentiments is a risk. That said, the structural strength of the Indian economy in terms of forex reserves, deficit situation, steps taken for augmenting durable growth through a focus on manufacturing has improved. Cumulatively these factors could work to assuage concerns around the negative impact of stimulus tapering on the market sentiments and economy.

Even as economic growth is improving, the equity markets trade at rich valuations, driven in part by global liquidity and in part by optimism due to ongoing vaccination drive and economic activity resumption. The corporate sector earnings are beginning to recover well, led by improved pricing power and rising demand. With earnings catching up, the market valuation metrics could begin to appear reasonable. Investors may continue to allocate to equities in a staggered and systematic manner for the long term.

The author is MD & CIO, –Emerging Markets Equity-India, Franklin Templeton

DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.

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