While the frothier end of the market of unicorns has already seen a low tide when it comes to fresh funding, the more sober end of the market might provide a positive surprise, writes T N Ninan
Writing a year ago at Diwali time, I had noted that the stock market had taken leave of its moorings, if not its senses, by shooting up 40 per cent in the previous year, on top of a double-digit increase in stock values the year before — in defiance of the sundry setbacks of the Covid pandemic. The new Samvat year 2078, I had felt, would therefore see a market correction or at least be a period when it would digest the excesses of 2077. As it turns out, that is precisely what has happened. The most commonly tracked market indices are broadly where they were a year ago.
It needed no great prescience to make such a forecast in October of 2021 since the market had become pricey. It was also clear that interest rates would be going up in the wake of inflation. Even without the Ukraine war, money was likely to flow out of the market, as opposed to coming in during the previous year. But it was equally obvious that retail investors would have few easy choices, since a period of rising interest rates would be negative for bond prices, and the real estate market continued to suffer from an overhang of supply. As for gold, its price was stabilising after a two-year price surge. Even now it is where it was two years ago. Like stocks, therefore, gold has taken time to absorb the sharp price spurt of the prior period. Perhaps it is this lack of options that has forced retail investors to continue pouring money into the equity market via mutual funds, while external portfolio investors have been pulling out cash.
The reassuring part of recent stock market history is that it is rare for the market to stay down for two years in a row. The last decade has seen just one year before the current one when the market dipped through a samvat year. However, the usual warning applies even more than usual, that the past is no guide to future performance, because of the abundant uncertainties — chief among them being the likely trajectory of the war in Ukraine, its economic impact and the non-trivial risk of nuclear escalation. If international money continues to head for the dollar when India’s growing current account deficit spells weakness for the rupee, there will be continued downward pressure on India’s stock prices.
On the domestic business front, corporate profits are still rising but have peaked in relation to sales because margins are under pressure in an inflationary operating environment. Interest rates will soon be approaching the end of the upward cycle, and that should make the debt market relatively attractive (or less unattractive) as an option. There are signs that consumer spending has revived, as has bank credit, but the K factor that has defined India’s two-speed economy for the last few years continues to operate in many markets (expensive cars are selling faster than cheaper ones, to take an example).
Meanwhile, with the advanced economies slowing further, if not sliding into recession, and oil prices unlikely to provide relief because of the production cuts announced by oil exporters, there will be little international support for Indian economic buoyancy. The global slowdown has already taken the fizz out of exports, and there may be worse to come. The government on its part is likely to be cautious in its fiscal stance for fear of stoking inflation, though some spending initiatives are inescapable in a pre-election Budget.
All things considered, the likelihood is that India will maintain a moderately upbeat economic tempo — i.e. well short of tearaway growth. As has been true for some time, a revival of private investment holds the key, but this has become a bit like waiting for Godot. This may well hold the key to the market, which looks forward, not back. So while the frothier end of the market, in which unicorns have been thrashing about, has already seen the effects of low tide when it comes to fresh funding, the more sober end of the market might well provide a positive surprise.