Meanwhile, results have been broadly in line in the latest earnings season, as noted by Jefferies’ India office recently (see Jefferies research India Equity Strategy: Multiple reliefs but no rally yet, 13 February 2025). Out of the India universe of 183 companies for which the December 2024 quarter results were analysed, the ratio of upgrades/downgrades stands at 39%/53%, reflecting an improvement compared with 31%/62% in the previous quarter (see Exhibit 10). During the latest result season, the Nifty FY25 forecast EPS has remained broadly unchanged, downgraded by only 0.4%.
The retreat from domestic cyclicals has been rationalised, based on GREED & fear’s discussions with domestic fund managers in Mumbai this week, by the desire to rotate into more consumption-related plays on the view that the Modi government in its third term has turned more “populist”, as reflected in cuts in government- funded capex and a greater willingness to indulge in handouts, a trend also seen at the state government level as previously discussed here (see GREED & fear - Alternating narratives, 28 November 2024). If such handouts, currently running at an estimated 0.9% of GDP at the combined central and state government levels, should be a positive for rural consumption, the personal income tax cuts announced in the budget should also be a positive for urban consumers (see GREED & fear - Tariff tantrums and out of the box, 6 February 2025).
If this is the current focus, the much discussed slowdown in government capex should be kept in context. This is a slowdown to 10% growth in the fiscal year beginning 1 April, or the same level of prevailing nominal GDP growth (see Exhibit 11). It is also in GREED & fear’s view premature to give up entirely on a private sector capex cycle which is the current mood of the moment. Corporate balance sheets remain underleveraged, and banks are willing and able to lend. The non-financial corporate debt to GDP ratio has declined from a peak of 72.7% in 4Q12 to 56.1% in 2Q24, though up from 49.9% in 1Q20 (see Exhibit 12).
Meanwhile, one issue for corporates is that India has of late been following a US-style path where companies have enjoyed a windfall in recent years relative to labour in terms of the share taken by profits rather than wages. This trend gained momentum with the cut in the corporate tax rate in 2019 from 32% to 22% for existing domestic companies and from 25% to 15% for new domestic manufacturing companies. Thus, employee costs for listed companies under Jefferies coverage rose by an annualised 10% over the past five fiscal years, while their profits increased by an annualised 18% over the same period (see Exhibit 13).
If this has been good for the companies dominating their sector, it also explains why the stock market has achieved positive returns for the past nine years (see Exhibit 14).
The other negative for the equity market has been credit and monetary tightening which have now ended. Loan growth has slowed from 16.6% YoY in February 2024 to 10.6% YoY in November and 11.3% on 7 February since the Reserve Bank of India targeted loan-to-deposit ratios. But with loan growth now more in line with deposit growth that pre-emptive tightening looks to be over. India bank deposits rose by 10.6% YoY on 7 February (see Exhibit 15).
Meanwhile the RBI, under its new more doveish leadership, announced on 7 February its first rate cut since May 2020 with the policy repo rate declining by 25bp to 6.25% (see Exhibit 16). Still real interest rates remain relatively high. The real policy repo rate, deflated by CPI, is now 1.94%, and 2.59% if deflated by core CPI (see Exhibit 17). That said, the latitude of the RBI to cut, like other emerging markets, will be that much greater if GREED & fear’s base case turns out to be correct, namely that the US dollar peaked with Trump’s return to the White House in January, just as was also the case in January 2017 as discussed here last week (see Exhibit 18 and GREED & fear – Wake-up calls, 20 February 2025).
Returning to the stock market the positive point for now is that, as foreigners sell, domestic flows into equity mutual funds have so far held up to a remarkable extent (see Exhibit 19). For now there is confidence amongst mutual fund companies that these flows will continue since most are based on monthly instalment SIP schemes. Still the risk of outflows will grow when small to mid-cap funds start to show a YoY loss which on present trends is likely to be in about three months. Meanwhile, it may require mid-cap valuations to converge with blue chips to bolster confidence that the correction is done (see Exhibit 7), most particularly in a world where US stocks are under pressure.
Aside from India, the other Asian stock market which GREED & fear has been asked questions about in recent weeks, in terms of investors being long and wrong, is Indonesia. The MSCI Indonesia Index is down 10.1% in US dollar terms year to date and down 28% since peaking on 23 September around the time when Fed easing expectations peaked (see Exhibit 20).
