June 2023 ended with the market at an all-time high, on a weekly and monthly basis. All-time highs are considered significant events by technical analysts because they can potentially signal a blue skies scenario. We must add here, that in some cases, if the technical break out turns out to be false, they can also become significant tops.
In our last month’s newsletter, we noted that economic growth in the last 4 years has been slow, largely because of the pandemic and the strict lockdowns. For the BSE500 non-financials, although the aggregate EBIT showed a decline for FY2023, when looked at, ex of the material sector, the EBIT growth is 7.9%. For the 4-year period from FY2019 to FY2023, the EBIT growth is 8.8% per annum, reasonable given the circumstances, but below trend.
The recovery seen by India is a K shaped one, wherein the poor have seen their incomes lag, while the upper middle class and the rich have seen their incomes and spending expand. So, while metrics that correspond to usage of products and services by the poor, continue to be poor, other indicators of the economy like GST collections are maintaining a 12% growth trajectory. Some of the higher GST growth may also be due to better tax compliance.
It appears now that we have seen the back of covid and the movement of life, the world over, to normalcy is welcome. Economic growth rates which have been poor over the last 4 years, will hopefully move back to a higher trajectory, helped by reforms like GST, IBC and RERA. The cleanup of the NPAs in the banking sector also means that the corporate sector and the banking sector are healthier than before, and banks have adequate liquidity to lend, for the expected growth. Current estimates suggest about 6% real GDP growth for the year which is reasonably good. We expect growth rates to be in the 5-7% range over the medium term and our expectation is based on India’s low GDP per capita and the ability of Indians to provide goods and services to the developed world, given the connected world we live in. Covid provided an impetus to the exports of services perhaps as we all became comfortable with doing meetings, yoga sessions, etc online.
What is also helping India at the moment, is the West’s desire to diversify from their reliance on China as the sole supplier to large parts of their supply chain. This China plus, is an opportunity that is available to many countries and India is one of the countries which has a large opportunity. A lot will depend on the experiments that have started under the PLI program and the thing to watch would be the localisation of content over time.
While growth that one foresees over the medium term is reasonably good, what about the price that we are paying? When we look at the BSE Sensex, it is trading near the top end of its historical valuation band. So, there is not much room for comfort there and growth will need to kick in, to justify the valuation of the indices. For our portfolio we continuously undertake a process of downsizing positions which become expensive on their historical valuation bands and look to invest the proceeds of sale, back into other stocks where we feel we can get a good reward to risk ratio. As such, we do not see significant risk to our portfolio, should high valuations of the Nifty lead to a correction in prices. For our new accounts, we have been slowly scaling up our equity exposure as we see individual opportunities in the market.