Early Signals Through Charts

NETRA May 2024

Data & Risk Flash, India in Numbers
 Data Flash: Gold Futures Showing Rising Confidence In Gold’s New Bull Market

4.0 Globally, gold volumes & Open Interest are 0.9 5.0 China experienced a significant increase in volumes, but 0.8
3.5 seeing some occasional spikes 0.8 open interest remained unchanged, suggesting the spike 0.7
0.7 4.0
3.0 could be due to speculative trading. 0.6
0.6
2.5 3.0 0.5
0.5
2.0 0.4
0.4
1.5 2.0 0.3
0.3
1.0 0.2 0.2
1.0
0.5 0.1 0.1
0.0 0 0.0 0
May-19 Apr-20 Apr-21 Apr-22 Apr-23 Apr-24 May-19 Apr-20 Apr-21 Apr-22 Apr-23 Apr-24
Gold Volume (Mn) Gold OI (Mn) (RHS) China Gold Volume (Mn) China Gold OI (Mn) (RHS)
160000 In India, the Open Interest has seen one of 35000 250 Why such Divergence? Gold ETFs yet to 2500
140000 the biggest spikes. 30000 200 witness a surge in assets under management 2000
120000 25000
100000 150 1500
20000
80000 100 1000
15000
60000
10000 50 500
40000
20000 5000 0 0

Nov-04

Mar-19
Mar-20
Mar-21
Mar-22
Apr-23
Apr-24
Dec-05
Dec-06
Dec-07
Dec-08
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Feb-15
Feb-16
Feb-17
Feb-18
0 0
May-19 Apr-20 Apr-21 Apr-22 Apr-23 Apr-24
India Gold Volume India Gold OI (RHS) Gold ETF Holdings ($ Mn) Gold Spot $/Oz (RHS)

Source: DSP, Bloomberg; Data as on Apr 2024.

Risk Flash: US Interest Payment On An Unprecedent Ascent If the Fed Stays ‘Higher For Longer’
What path the US Federal Reserve chooses to This can turn out to be a major risk factor in the next Scenario 1
take with respect to the interest rate trajectory 140 Apr’25
is unknown. But based on Congressional few quarters. US Treasury market is the backbone of
global liquidity and stability. $1.7trn,5.7%
Budgetary Office estimates, if US Federal
Reserve keeps the Fed Funds rate as it is over 120
the next 12 months, the US interest payments 4.9 5.0
expenditure will rise to an all time high of 5.7% Scenario 2
of GDP at $1.7trn (see scenario 1 in the graph 4.6 Apr’25
100 $1.2trn,4.1%
on the right)

However, if the Fed embarks on shallow rate 4.3

cuts and delivers 150bps of interest rate cut, the 80 3.7
Federal Interest payment expense will rise to 3.5
4.1% of GDP, the highest levels in nearly 25 3.1
years (see scenario 2 in the graph on the right) 60 3.2
This means that US fiscal position is likely
2.8 2.8 2.7
becoming more arduous as we get deeper into 40
2024. The ability of US treasury to continue its
break-neck pace of borrowing will come into 2.4
question. A reversal or reduction in fiscal 20
2.3
expenditure at a time when interest rates are at
multi decadal highs is likely to be growth
negative and a headwind for equity markets
dependent on earnings growth. US Federal Total Federal Debt (% of GDP)
interest payments touched $1trn last month.
Federal Govt Interest Payment (% of GDP)
Source: CBO, DSP; Data as on April 2024.
Data Stacking: The 5-Year Look Back For Equities

The global market is currently experiencing a Premium/Discount

Earnings Growth
phase of remarkable optimism, buoyed by Country 5 Year Average ROE Current P/E to 5-year average
robust corporate performance and substantial (5 Year CAGR)
P/E
earnings growth. Notably, amidst this landscape, Brazil 16 17% 9 -27%
Brazil has emerged as a standout case. It not India 14 13% 24 -3%
only exhibits significant earnings growth, but France 10 10% 14 -15%
this growth is accompanied by an equally
Eurozone 10 10% 15 -10%
impressive valuation trend.
Vietnam 14 8% 15 -12%
Brazil is expected to post an earnings growth of US 16 8% 24 8%
20% in FY25 and the current valuations make it Canada 10 8% 18 1%
an even more lucrative investment opportunity Philippines 10 5% 13 -30%
within Emerging Markets. Taiwan 12 4% 25 41%
Malaysia 9 4% 16 -8%
China is facing some economic struggles, which China Mainland 10 3% 14 -6%
have led to market declines. Even though Mexico 14 2% 18 1%
earnings have been downgraded, the stocks are Japan 9 2% 27 8%
now available at good valuations. UK 10 2% 14 1%
One of the lucrative sections of EM, by size.
South Africa 15 -2% 17 11%
India stands out for its impressive earnings Indonesia 10 -2% 17 -21%
growth, albeit accompanied by premium Australia 11 -3% 19 2%
valuations. Consequently, Indian equities no Asia Ex-Japan 12 -4% 16 -5%
longer represent a bargain opportunity. Indian Hong Kong 10 -7% 10 -10%
equities lack margin of safety. Korea 7 -8% 19 19%

Source: DSP, Bloomberg; Data as on April 2024. Top 5 Most Expensive Markets (Red) & Bottom 5 Cheapest (Green)
Data Stacking: The Current Picture for Equities

Emerging markets vary widely in quality, with

India considered high-quality and traditionally
expensive, while China and South Korea are
perceived as lower quality and cheaper.
Investors should assess these markets
differently.

India's appeal stems from favorable

demographics, economic reforms, and supply
chain realignment. Despite its high price-to-
book ratio (over 4x, akin to the U.S.), its return-
on-equity matches that of the U.S., justifying a
premium valuation. If India were to cheapen
significantly, it could offer an excellent entry
point for long term investors.

Similarly, the U.S. market features quality

companies with elevated valuations, contrasting
with Japan's historically opposite traits.

However, recent corporate governance reforms

in Japan are driving improvements in ROE and
P/B, offering investors a rare opportunity for
market revaluation.

Source: DSP, Bloomberg, FactSet, MSCI, J.P. Morgan Asset Management. Numbers are based on MSCI indices except for the U.S. which is based on the S&P 500 Index. ROE = return-on-
equity and P/B = price-to-book ratio. Last 12-months' figures. Guide to Investing in Asia. Data are as of April 26, 2024.
Data Stacking: Long Term Equity Returns Are An Exception, Not the Norm
Local Currency Real Returns Real Returns US Bond
USD Returns
Country returns (Local Currency) (USD) Market
CAGR (30 Years) Index
Malaysia 2% -1% 0% -3%
Most equity investors believe that equity China (HK
0% -3% 0% -2%
markets deliver superior returns over the long Listed)
term. This is true. But only in a very few Philippines 3% -2% 1% -2%
markets. Long term equity returns are an
exception, not the norm Japan 2% 2% 1% -2%
Korea 4% 1% 2% -1%

Over the past 30 years, among the 16 major Indonesia 9% 1% 2% 0%

indices, only US market has generated returns Hong Kong 2% -1% 2% 0%
higher than US Bonds. France 5% 3% 2% 0%
4.5%
In USD terms, more than half of these markets UK 3% 1% 3% 0%
have generated nil to negative real returns over Australia 5% 2% 4% 2%
the past 30 years.
Mexico 11% 3% 5% 3%
Even in local currency terms, there is no index Canada 6% 4% 6% 3%
which has generated double digit real returns China
over the last three decades. 5% 2% 6% 3%
Mainland
Brazil 16% 9% 6% 3%
India 10% 4% 7% 4%
US-S&P 500 8% 6% 8% 6%
Source: Bloomberg; Data as on Apr 2024. Bloomberg US Aggregate Index is considered for US Bond Market Index.
China's Equity Lags Despite Boasting a Far Larger GDP
China’s underperformance has been stark. It’s India’s strong and steady earnings growth has
China’s equity markets have lagged Indian been the main driver of India’s outperformance
equity by a long stretch. China’s current equity fortunes likely linked to its growth outcomes.
market capitalization is double that of India, at a EPS Growth
5.5 4.8 MSCI India MSCI China
time when it’s GDP is 5 times that of Indian GDP. (CAGR)
1 Year 13% -2%
Between 2004 and 2021, China’s economy 3 Year 19% -9%
outgrew India’s GDP at a ferocious pace, but has
lost some relative momentum since. Over the 1.6 2.1 5 Year 10% -5%
past 3 years, Indian economy and equity 10 Year 8% -4%
markets have outperformed China. 15 Year 7% 2%
At this juncture, India’s frontline stock index, the China / India Equity Market Capitalization 20 Year 11% 5%
Nifty 50 Index trades at 23x trailing earnings,
while the Shanghai Composite trades at 11x
trailing earnings.
600 Cumulative Foreign Flows (US $)
5.7
5.3 5.1
500
Can these valuations differential sustain? 4.6 400
Can the size of the economy begin to converge,

$ Bn
and India outgrow China over the next few 3.8 3.6 300
years?
200
2.8
The market is behaving as if the answer to these 100
two questions is a yes. But valuations
attractiveness could be a major hurdle. -

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023
Source: DSP, Bloomberg; Data as on April 2024. China US$ GDP / India US$ GDP China India
India: A Trillion Dollar of Annual Investments

India has come out of an investment winter.

Gross Fixed Capital Formation in current US Dollars by country
The investment to GDP ratio (measured as 1990 1995 2000 2005 2010 2015 2020 2023 CAGR
Gross Fixed Capital Formation to GDP) peaked
in 2011 and remained low until the COVID-led 1269 1697 2373 2990 2756 4656 6240 8006 14.4%
disruption upended the supply chains. Post 1114 1594 1415 1251 2674 3778 4602 5774 4.7%
COVID recovery and a large push through
government expenditure, the investments are 433 609 450 901 1303 1110 1289 1109 8.1%
making a come back.
297 321 395 543 664 672 837 1087 -0.1%
Over the last seven and a half decades, $14trn
has been spent on investments since 258 243 297 479 585 604 728 979 6.3%
independence. This includes spending on 148 238 294 447 557 524 616 620 2.3%
housing by households, infrastructure creation
by the government, and private capital 129 111 146 269 399 509 471 531 2.2%
expenditure. India has spent $8trn on new
investments over the last 10 years. As the base 95 92 122 256 379 371 384 490 4.1%
becomes large this number will repeat itself in 86 91 108 188 330 354 322 434 3.3%
the next 5 years.
84 83 44 136 311 281 301 416 4.9%
What does this mean?
The size of India’s annual investments is India China Russia France United Kingdom
becoming large enough for it to get your
immediate attention. Australia Canada Japan Germany United States

Source: World Development Indicators, Bloomberg, DSP; Data as of Apr 2024

Indian Economy Dancing To Its Own Tune
March 2023
While the global economic landscape has been
India

Manufacturing PMI
a bit wobbly, India has remained a steady ship
in choppy waters. The economic growth has 54 Russia
been consistently strong with corporate top USA
line and profit growing steadily. Australia Canada France Eurozone China
49
Japan
As is visible from the graph on the right, over Sweden Brazil UK
the past 12 months, most economies have seen Switzerland
44 Germany
a slowdown in their manufacturing sector or
services, or both. India, over the past year, has 48 50 52 54 56 58 60
seen a consistent growth in economic output Services PMI
and business sentiment.

Its divergent economic trends have long been 60 March 2024

an outcome ‘in-waiting’, though never realized. India

Manufacturing PMI
But over the past year, India has shown a 55 Russia
consistency which is probably the first evidence USA China Brazil
suggesting that India’s economic and Canada
50 Sweden
businesses cycle can withstand global Switzerland UK Japan
turbulence of manageable magnitude. Australia
45 France Eurozone
The reason? Germany
A stable external situation. Read ahead. 40
45 47 49 51 53 55 57 59 61
Services PMI
Source: Bloomberg, DSP; Data as on Apr 2024
India Stands Out With High Real Rates
Interest Rate (%)
Most emerging market currencies are struggling India 6.5
with negative carry against the US Dollar. This US 5.5
has forced the central banks of these countries Guatemala 5
to be cautious in FX policy and setting their Israel 4.5
interest rates. Vietnam 4.5
Bulgaria 3.79
Recently, Indonesia has raised rates to 6.25% to Moldova 3.75
South Korea 3.5
support its currency as US Dollar strengthens. China 3.45
For India, a mix of strong current account, Malaysia 3
strong FPI inflows, especially in debt markets, Thailand 2.5
and RBI’s wait and watch approach has helped Taiwan 2
the currency. Strong services flows and
remittances have been a big pillar of support Balance of Payment Components FY15 to
FY24 FY23 FY15 FY14 FY13 FY12
which has kept India’s macroeconomic outlook (USD, Billions) FY12 (avg)
stable. Current Account -78 -67 -56 -27 -32 -88 -78
This circle of reinforcements has allowed Merchandise -240 -265 -170 -145 -148 -196 -190
monetary policy to remain stable in the face of a Oil Trade Deficit -96 -112 -96 -81 -102 -103 -99
wobbly globe. Oil Trade Deficit (as a % of GDP) -2.7% -3.3% -5.1% -4.0% -5.5% -5.6% -5.4%
The biggest risk to this hypothesis flows from Services 162 143 70 77 73 65 64
domestic price pressures, which for the time Remittance 103 101 65 66 65 64 63
being remain benign, and through any spike in
crude oil prices. Services + Remittance 265 244 134 142 138 129 128
Services + Remittance as a % of GDP 7.5% 7.2% 7.1% 7.0% 7.4% 7.0% 7.0%
Current Account Balance as a % of GDP -2.2% -2.0% -3.7% -1.4% -1.8% -5.7% -5.7%
Source: Bloomberg, CMIE; Data as on Apr 2024.
 India’s Market Cap to GDP At Record, Profits Lag
Profit/GDP Profit/GDP
6% 1.0% 4%
Profit to GDP reverting Domestic focused firms have
to long term averages. 0.8% 3% showcased large outperformance.
4%
0.6%
2%
0.4%
2% 1%
0.2%
0% 0.0% 0%

Jun-23
Apr-16

Apr-17

Nov-18

May-19

Nov-19

May-20

Nov-20

May-21

Dec-21

Dec-22

Dec-23
Sep-15

Oct-16

Oct-17

Apr-18

Jun-22
Nov-18

Nov-19

Nov-20
Oct-16

Oct-17

Dec-21

Dec-22

Dec-23
Sep-15

-1%

Large Cap Mid Cap (RHS) Small Cap (RHS) Domestic Export

Market Cap/GDP Market Cap/GDP

120% Market Cap to GDP for SMIDs is at a record high, 120%
Export oriented firms have lagged
100% driving the cumulative number to a new peak. 100% domestic firms in Market Cap accretion.
80% 80%
60% 60%
40%
40%
20%
20%
0%
0%
Apr-18

Oct-23
Mar-16

Apr-17

Apr-19

Apr-20

Apr-21

Apr-22

Apr-23

Apr-24
Oct-17

Oct-18

Oct-19

Oct-20

Oct-21

Oct-22
Sep-15

Sep-16

Apr-21
Sep-15
Mar-16
Sep-16
Apr-17
Oct-17
Apr-18
Oct-18
Apr-19
Oct-19
Apr-20
Oct-20

Oct-21
Apr-22
Oct-22
Apr-23
Oct-23
Apr-24
Large Cap Mid Cap Small Cap
Domestic Export
Source: DSP, Capitaline; Data as on Apr 2024.
What Has Contributed To Corporate Profit Growth In India?

India has now become the second largest

equity market in Emerging Markets. India’s
share in emerging markets has increased from
7.8% in 2020 to 17.7% at present. This
substantial growth is primarily attributed to the
increased profitability of companies, surpassing
their pre-COVID growth rates, and to consistent
performance of equity indices.

What contributed to healthy levels of profit for

corporate India? Data for NSE 500 Index companies in local currency
A growing topline and stable profit margins for
Indian companies and a relatively stable
financial and tax regimen. The effect is a
double-digit Net Income/Profit Growth at a
broad level over the last 20 years.

A deeper analysis reveals that this feat was

achieved through enhanced capacity utilization
and increased capital expenditure, which
propelled revenue growth and consequently,
profit growth.

Positive Contribution to Profits Negative Contribution to Profits

Source: DSP, Bloomberg; Data as of Apr 2024. The data is of Nifty 500 companies.
Cyclicals Have Dominated This Bull Market Earnings Growth

Earnings growth in Nifty 500 stocks (starting Pre-Covid as of March 2020) till 31st Mar 2024
From the last quarterly earnings (March 2020),
before COVID led disruptions hit corporate Earnings Multibagger (Companies which at Earnings Detractors (Companies which
earnings till the end of FY24, there is diverse least doubled their Earnings) gave negative growth)
performance from companies.
Sectors No. % Sectors No. %
A significant portion of companies in the
Commodities sector have seen their earnings Commodities 21 35% Commodities 23 38%
double or more during this period. Sectors such Financial Services 25 28% Financial Services 21 24%
as Commodities, Energy, and Utilities have
exhibited robust earnings growth, suggesting a Energy 5 26% Energy 4 21%
favorable environment for cyclical companies.
However, the sustainability of this growth Utilities 4 24% Utilities 6 35%
remains a pivotal question.
Healthcare 7 16% Healthcare 15 34%
Conversely, major sectors including consumer Industrials 10 15% Industrials 26 40%
discretionary, IT, and FMCG have experienced
subdued earnings growth—a departure from Consumer Discretionary 15 13% Consumer Discretionary 49 43%
the norm during periods of robust market
performance. The prevalence of a bull market Services 2 10% Services 5 25%
driven by cyclical companies introduces a Information Technology 2 10% Information Technology 5 24%
degree of apprehension, as such markets are
inherently prone to correction. FMCG 3 9% FMCG 12 34%
Telecommunication 0 0% Telecommunication 2 33%

Source: DSP, Bloomberg; Data as on Apr 2024.

What’s your seesaw to success?

Source: Money Visuals, LLC

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