In an uncertain world, investors need to synthesize the impact of various risks on the performance of their portfolios. With a confluence of risks at play, geopolitical risk is increasingly becoming a top-of-mind factor for smart money. The rise of right-wing politics, the emergence of multiple sovereign powers competing for global supremacy and increasing nationalism, poses a challenge for people, capital and technology to move freely.
The Indian economy, particularly, the financial markets have felt the brunt of macro-level developments. The US-China trade war and Brexit continue to impact capital markets, the US-Iran flare up particularly threatens India’s fiscal balance as India imports nearly 90 per cent of its oil from Iran. While a de-escalation appears to be likely, supply-side shocks will continue to pose a threat to India’s current account deficit. With BREXIT, India’s flagship IT and ITES market are likely to witness increased overhead costs of setting up operations within the UK and EU.
While macro factors continue to impact the Indian economy, domestic risks such as the liquidity crunch, lagging job growth, weak buyer sentiment owing to the dual shocks from demonisation and Goods and Service Tax (GST), and highly leveraged corporate balance sheets, have brought India’s economic momentum to a halt.
GDP estimates have hit an all-time low with growth plummeting to below 5 per cent, factory output is at its lowest point in eight years reflecting a slowdown in investment and consumption activity as the food-driven inflation at just under 5 per cent remains at a 16-month high. Rural and urban unemployment numbers have seen a sharp rise nationally and pose a risk to the promise of India’s demographic dividend.
The Indian economy has hit a slump on the back of double shocks namely demonetisation and implementation of GST coupled with declining revenues and rising debt loads. While intended to structurally boost the economy, these two measures have created a slowdown in the short-term.
Declining revenues across sectors have put immense pressure on the debt servicing capabilities of companies. High debt concentration has further impacted the economy negatively. According to RBI data, loan exposure to the top 20 borrowers has spiked by about 24 per cent from FY 2018 to FY 2019. At the same time, India's total outstanding loan portfolio has grown only 12 per cent. On the back of weakening demand and a severe liquidity crunch, top manufacturers have cut production and closed manufacturing facilities as evidenced in the auto sector. Real estate and ancillary industries have hit a low due to oversupply.
While necessary measures are been taken by the government to boost demand and consumption, foreign direct investments (FDI) inflows and ease of doing business have improved.
Technology as a sector has contributed significantly to growth in FDI on the back of rapidly increasing digital penetration and online consumption in one of the world’s largest online and mobile user bases.
E-tailers, online aggregators, fintech providers have registered exponential growth surpassing physical barriers to tap into a rising consumer propensity for online consumption. With an increase in regional language focus, digital offerings are now being made available to a whole new demographic segment.
Indian is a vibrant market for young entrepreneurs and the start-up eco-system is deep in terms of talent, and capital availability. Sectors such as retail, media, food and beverage, and e-commerce are seeing intense competition and the Indian consumer is winning.
Amongst the various asset classes (fixed income, real estate, gold, equity), equity markets have been the dominant source of wealth creation and will continue to be so. However, valuations remain high even in the backdrop of underwhelming economic indicators, this is potentially indicative of the transitional nature of the challenges that are limiting current growth, India’s long-term fundamentals are still very compelling.
Anticipating a volatile year ahead for the equity markets, Exchange Traded Funds (ETFs) are a rather good bet to manage market uncertainty. ETFs have become tremendously popular because they allow investors to quickly own a diversified set of securities, such as stocks, at a low cost. They also allow investors to get very specific exposure to areas of the market, such as industries and asset classes and are ideal for investors with limited experience.
The author is the Co-Founder and Managing Director of CredAble