World: Ready, Set, Slow; India: Ready, Set, RUN!!!

- Vikram Kotak

As we glance at the rearview mirror on the world highway, observing an Indian car cruising with not many vehicles in sight and a long 'runway' of opportunities ahead, one might argue that it's the opportune moment for India to shift gears to the next level. I firmly believe that India's moment has arrived on the global stage.

If one were to reflect on the multitude of changes made on the policy fronts, it becomes evident that the seeds that were sowed over the last few years in the form of tax and structural reforms - GST, Corporate tax cuts, PLI, RERA, Digitisation- were all intelligently implemented keeping the coming decades and not just years in mind. While there is ample room for improvement in various spheres, it is noteworthy that in a world grappling with challenges such as ballooning debt, high inflation, an aging population, and deglobalisation, India stands ahead. This is not only due to its sheer size and consumption potential but also due to various measures that have gradually started aligning the growth trajectory in India's favour.

In 2023, the world witnessed some recovery from the low base of growth in 2022, however unfortunate events like the wars and conflicts have elevated geopolitical risks.

For India, 2023 has been the most eventful year not only from the stock market perspective, but also equally noteworthy are its historic achievements in space exploration. The political landscape gained stability, supported by the soundness of India's efforts to contain inflation. Simultaneously, India successfully propelled the three engines of growth:

1. the "Make in India" initiative

2. the acceleration of India's digital journey, and

3. the flourishing capital markets.

Here are a few noteworthy events:

Population Milestone: India surpassed China to become the most populous country. This demographic advantage could be transformed into a sustainable growth model. With 68% of the Indian population between the ages of 15-64 and a median age of 28, whereas China has a median age of 39 years, India holds a significant advantage over larger countries. Factors like good governance, an attractive tax structure, a large English-speaking population, and enterprising citizens contribute to this advantage. Political stability, as evident from recent state election results, underscores the popularity and trust in the current leadership.

Make in India: The timing of the capital expenditure cycle turning on the positive side coupled with stable interest rates, policy incentives, and reduced corporate tax rates, positions India as a scalable opportunity, especially with decline in outsourcing from China. Digital Transformation: India's digital journey continues to unfold, connecting various aspects of people's lives, from spending and earning to tax and toll payments. With a young population and high-quality data, digital adoption is irreversible in India. This not only speeds up transactions but also prevents leakages from the system. India accounts for 46% of real-time digital transactions, and the rise of e-commerce and e-payments indicates a promising trajectory.

Booming Capital Markets: The COVID-19 pandemic prompted Indian retail investors to shift towards equities, challenging the longstanding preference for gold and real estate. The market cap of Indian markets surged by ~$900 billion in the last nine months, a remarkable ~30% growth. This growth, equivalent to the GDP of Switzerland in 2022, underscores India's potential. The country's inclusion in the JP Morgan Bond Index is seen as a significant step, making India a preferred destination for global investors. The trinity of Jan Dhan, Aadhar and UPI and strong push by government has enabled rapid strides in financial sector inclusion.

Space Exploration: India became the fourth country to successfully soft-land on the Moon, making India the first country to reach South Pole. Vikram Lander has elevated India's global political standing, showcasing the country as a leader in innovation with cost-effective solutions.

In conclusion, India's diverse strengths across demographics, space exploration, digital transformation, manufacturing, and capital markets positions India as a promising player on the global stage.

Let's look at what's in store for India in 2024.

In 2024, when considering the global outlook, there are two phrases to describe growth. For the world at large, it's “Ready, Set, Slow,” but for India, it's a more dynamic “Ready, Set, and Run.”

Examining the developed world, especially the USA, real interest rates have tightened significantly over the last 24 months, the impact of this on consumption will be felt in 2024. Interest rate tightening seems to have concluded, except for Japan, which recently began its tightening cycle. Positively for EMs like India, we are likely at the peak of US Fed rate cycle, and 2024 will mark the onset of gradual easing cycle. Globally, Canada, Europe, Japan, and the UK are already experiencing a recession. Due to the lead & lag effect of interest rate hardening the developed economies may experience demand softening which in turn would mean slowdown in overall economic activities. This is likely to soften the commodity & oil markets The USA is expected to slow down, triggering bond purchases by long-term investors such as pension funds and sovereign wealth funds. China is unlikely to surprise on the upside to the GDP growth expectations in 2024, signalling that commodities may remain at the lower end of the price spectrum, barring extreme geopolitical events.

Favourably, the oil prices, a bugbear for the Indian economy, are expected to prevail within an acceptable range. While geopolitical risks and sharp China revival do pose upside risks, the spare capacity following production cuts by OPEC+ in 2023 as well as softer global growth outlook should cap the price.

In summary, a benign interest rate environment and a stable outlook for commodities prices sets a solid stage for India's continued economic growth. India is flourishing in terms of equity participation, and with steady earnings growth, it is likely to accelerate further.

We had predicted a few years ago that India's weight in MSCI would double to 15%, and that prediction has come true. Now, I believe it has the potential to double from here, if not more, possibly reaching 30% in the next few years.

The representation of the Middle East region in the MSCI EM index, along with India, had steadily risen in recent years. However, the escalation of the Israel-Hamas war does elevate the geopolitical risk premiums investors would assign to the Middle East region. The turn of events, further cements India's promise as one of the few major economies structurally poised for multi decadal growth and of stability as well.

From a sector perspective, we believe that the Non-Banking Financial Companies (NBFCs) will outperform banks. Sectors like consumption, which lagged in growth and market performance over the last two years, are expected to perform well. Capital markets and capex themes will attract significant investment, though the risk-reward ratio may not be as favourable as it was 12-15 months ago.

Domestic opportunities in sectors such as autos, airlines, and digitally-adapt businesses poised for scale and size with cost optimization are likely to thrive. While growth has traditionally outperformed value, the trend has shifted, and the next two years are expected to favour both value and growth.

The macro remains conducive: India is expected to deliver the highest growth among the larger economies. The risk variables like Fiscal & Current Account Deficit and Currency are well under control. We expect RBI to cut rates by 50 bps in 2024 and Rupee to appreciate mildly on the back of weakening USD. The construction cycle is already underway with rise in Government's infra spending and the real estate upturn. Rising private capex should further accelerate the capex cycle. Corporate balance sheets and Banks are in great shape laying a platform for a strong private capex cycle. Consumer sentiment and any negative impact of monsoon is the key monitorable in the near- term.

Despite a ~30% rally in the last 9 months, India remains a "buy on dips" market for the foreseeable future. As an emerging market, volatility is expected, but every dip due to unforeseen events is seen as a buyer's delight.

India is a story of 5D's. We already have the four "D's" playing out in its favour - Demography, Deglobalization, Daring, and Digitization- as key factors shaping its future. The only missing D is becoming a Differentiator, which will be a key catalyst to further unlock its true potential. India should eventually emerge as a land of innovators and thought leaders.

The quote that registers through my mind currently emphasizes the need for India to assert itself on the global stage: "Unless India stands up to the world, no one will respect us. In this world, fear has no place. Only strength respects strength." It's time for India to shed its Emerging Market tag and think like a global beacon in every facet of business.