Below is the view on The intensifying macro risks in India by Ritika Mankar Mukherjee, Director and Senior Economist at Ambit Capital Pvt Ltd
The intensifying macro risks in India
Even as GDP growth is likely to surprise on the upside in FY19, we highlight five rising macro risks which the stock market appears to be unnaturally sanguine about. Besides the all-too-familiar risk of India’s ‘twin deficits’ raring their ugly heads, three other macro risks that need to be watched closely are: (1) India’s household savings to GDP ratio and financial savings to total savings ratio could dip if inflation rises, restricting equity market inflows; (2) in the upcoming General Elections, the NDA’s seat count could drop to sub-220 levels if the BJP is unable to block opposition alliance formation; and (3) the assumption of power in Pakistan by an Army-backed coalition government could translate into structural escalation of Indo-Pak hostilities in the medium term.
GDP growth will surprise on the upside in FY19…
GDP growth in India appears set to surprise on the upside in FY19 as an election-focused Government pulls out all stops to gratify the voter and stimulate consumption growth (Ambit estimate is 7% for FY19 v/s 5.8% in FY18). However, it is worth noting that the stock market seems to be more than adequately discounting this economic buoyancy as the Sensex is currently trading at a 57% premium to 9 EMs’ median P/E as compared to the 5-year average of 23%. Given that the market clearly seems to be building in a bluesky scenario for the Indian economy, we highlight 5 macro risks building up that could precipitously affect investor appetite for Indian stocks.
…but five big macro risks are slowly but surely escalating
Over and above the risk of India’s twin deficits rising, we highlight three other noteworthy macro risks that are currently in the making.
Firstly, India’s household savings to GDP ratio currently stands at a 20-year low. If inflation rises hereon owing to the fiscal pump-priming, then not only can the household savings ratio come under greater duress but worryingly the proportion of ‘financial savings’ in total savings could fall, limiting domestic flows into the Indian stock market.
Secondly, our work with renowned psephologist Rajeeva Karandikar suggests that in a worst case scenario, the NDA’s seat count could dip to as low as 213 seats (vs the halfway mark of 273 seats) if the opposition is able to stitch up a handful of clever alliances in states like Uttar Pradesh and Maharashtra whilst the BJP on the other hand divorces its regional allies.
Lastly, over the next few years, there is a serious risk of Indo-Pak hostilities rising structurally as a government beholden to the Pakistani army control of the tinderbox-like state of Pakistan.
Even as GDP growth in FY19 will be a non-issue as the Government injects a record fiscal stimulus, we worry that the stock market is in overvalued territory and is perhaps allocating an unduly low weightage to the increasing macro risks listed above. Given this scenario, we would urge investors to only invest in Good & Clean stocks to limit downside risks. Furthermore, given the rising risk of fiscal profligacy and given the risk of financial saving inflows slowing, we urge investors to be cautious regarding their NBFC sector exposure. Consumption (especially rural) and quality industrial plays (like cement and a few road builders) could be another set of ideas to invest in.
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