Showtime for India Saturday, Sep 03, 2022 by: PMS AIF Worldposted in: counseling, finance, NRI, PMS, PMS Articles While rate hike fears have eased down a bit, it’s now time to factor in the next demon in line: Recession. Let us understand how some of the top economies of the world are grappling with recessionary fears. US, Europe, UK The drop in Brent and WTI, to a very low level in early August on fears of recession and softening global economic growth is worrying global investors. So, the pertinent question is: Have the markets factored in a possible recession looming over developed economies? As of June, Quarter ’22, US GDP declined for the second straight quarter, more or less a confirmation that the world’s largest economy may be entering recession, if 3rd quarter show negative GDP as well. The recession fear looms over the United Kingdom as well, as with a rise in the price of natural gas, recession fears have intensified in Europe. As Ukraine completes 6 months of going into war, the devastation is felt way beyond its borders. The Euro, Europe’s de facto currency is at a 2 decade low. Let us tell you what does this imply. Europe has 27 countries and 19 of them use the Euro as its currency. The Euro is losing its value because European economies are facing 3 major challenges – – Energy Crisis [this can single-handedly destroy Europe’s economy] – High Inflation [currently at a 25-year high at ~10%] – Political Turmoil Europe’s growth engine, Germany, the largest economy in Europe, gets almost half of its Gas supply from Russia. Based on macros, if Moscow cuts off this supply completely, Germany could lose $225 bn in 2 years. Couple this with inflation, it is evident that the Euro zone is not insulated with the rising cost of living. The numbers are scary across Europe- from energy to food, everything is becoming expensive. Italy, Europe’s 2nd largest economy is also losing its trust in the face of the world economy. The political chaos tumbling down Italy might be a trigger to shake up the entire European economy. Investor confidence in the German economy is at the lowest level in at least a decade- this was seen when Investors dumped Italian govt. bonds in July ’22. UK [technically not a part of the EU but a major European economy], is in a dire state. The Bank of England expects the country to enter a recession from the fourth quarter of this year, which will last until the end of 2023. The US, EU, and a the large part of the Western world is very clearly heading towards an economic recession. China China’s current status in the global economy is not what it once was. The US has been actively working to keep China from having access to cutting-edge technology. China’s property sector, which contributes to around a quarter of their total GDP, is suffering. Droughts, heat waves, and flash floods have been causing a lot of problems for China lately. These problems are happening at an alarming rate due to climate change. Experts predict that the heat wave could be one of the worst in global history. INDIA But INDIA continues to clock economic numbers in green, leaving several economists puzzled. Is India insulated from the economic upheaval ongoing globally? In geopolitics, never before has India been so highly wooed. The US is looking for supporters in Asia to counter China, and India is an obvious choice. India is well positioned to take advantage of the shift away from China in both political and economic arenas. Just as the US cultivated China as a rival to the Soviet Union, India may increasingly play that role against China. As of today, when most advanced and emerging economies are struggling to control inflation rates even at 14-15%, India has been able to control and maintain it in single digits. India took supply-side measures early-on & hence has been able to remain relatively stable and insulate itself in this time of great economic volatility globally… The economic recovery is picking up pace here, in India. With the bank credit growth rising rapidly, we could be in a position for a recovery in investment demand. Our demand-driven economy is well insulated from the global slowdown, and our export supply of services continue to witness robust growth. While the markets have corrected, valuation premiums are still being enjoyedin the equity market & a strong results season has concurred the fact that India’s business cycle is indeed turning up. But this is not just a short-term opportunity. We have the chance to enter a new growth trajectory. India achieving its growth potential is linked to the revival of private capital expenditure, emphasising the dire need for businesses to start making fresh investments. There have been a lot of reforms started by the government. One of them is GST. There are also some benefits coming from the bankruptcy law, lowering corporate taxes, fuel subsidy removal, and RERA among others. Privatisation and monetizing public assets are in progress as well. The Production-Linked Incentive (PLI) scheme has been rolled out to attract investors to manufacture in India, and it has already started showing results. India’s vibrant start-up sector showcases our potential to attract capital as well. Can corporate India deliver 15% plus earnings growth over the next two-three years? The answer is definitely yes. Flows have started to ebb, and there is a case emerging that Indian markets could outperform global markets. The economy is in a good restart mode. The capex has started, and corporate earnings were also reasonably good in the first quarter, despite so many challenges on the raw material side. We are, overall, in a good state of health. India’s corporate earnings and quality of its balance sheet are likely to outperform even among emerging markets. Of course, there are headwinds such as inflation, rural slowdown and tightening monetary policy that investors must keep a watch over, but, we have maintained stability as a country and our ruling party has shown that it is good at balancing capitalist and democratic needs. However, we have our demons as well- the biggest of them being unemployment. Topping it up, providing decent jobs for the underemployed masses is a huge challenge. There are still vulnerabilities in our fiscal situation and given the macro outlook across the globe, an epidemic from abroad is a big worry. Nevertheless, this time we have an extremely promising conjunction of circumstances, both internal and external, that could take the nation to reach new heights. The Indian economy stands insulated to the recessionary realities of the West & this is an opportunity that is only ours to lose. Move over Sweet Seventeen, it’s time for us to celebrate the Sweet SeventyFifth as 75 years after Independence, India is in a very unique sweet spot today. All we have to do is to seize the moment.