Despite massive pessimism around the global economy right since the start of the COVID crisis, the global economy has reshaped and fought back. The year 2022 brought back again fear of recession in developed economies. But investing prudence always lies in looking at the larger picture not only at a chip of the block.
- Sky high Inflationand the word ‘Recession’ dominated most of 2022. Recession apprehensions were palpable in every investor I spoke with and they had all the reason to talk about it. The war between Russia-Ukraine is not a usual situation. Russia happens to be the nerve centre of Global energy supplies and Ukraine commands sizable supplies of food grains, 40% of worlds wheat is supplied from Ukraine.
- Just for the record: Developed economies flirt with recession on a periodic basis. The technical definition of a recession is ‘Two successive quarters of fall in GDP’. This is quite normal for large economies which struggle for economic expansion.
There have been 11 recessions in the US since 1948, averaging 1 recession every 6.5 years. The last was in 2007. Recession risk in the global market not in India. There could be volatility due to global factors. However, in last 2 decades we have seen massive intervention of Central Banks to tackle Recessionary conditions, so going forward we will witness less severe recessions.
Shockingly high US inflation in early 2022 had set the tone for a severe interest rate hike and the US FED responded with a 4% increase (From 0.25% to nearly 4.25%)benchmark interest rate hike to tame inflation but still, a lot needs to be done.
- 2022 witnessed the collapse of bubble Assets like Cryptos which collapsed over 70%, and Correction in Overvalued sectors like technology and tech-heavy startups. However, despite geopolitical uncertainties, high global inflation, and consistent selling by foreign investors in India, domestic flows remained resilient helping the benchmark indices hit new all-time highs this year.
- Dollar Index shot up nearly 20% from 95 to 114, before cooling down to 103 towards 2022 end. A sudden spurt in USD is a big negative for net importers like India.
Fast Forward to 2023:
Analysts like Goldman Sachs foresees FED is not done with its Rate hikes and projects another 1%-1.25% rate hike taking US benchmark rates to the 5.5% range. HSBC’s view is a little lesser, a 0.50% rise in 2023. Still, such interest rate levels were last seen 15 years back in 2007.
US benchmark interest rates.
Production constraints are fueling inflation and macro volatility. Central banks cannot solve these constraints. This leaves them raising rates and engineering recessions to fight inflation. With recessionary conditions globally, H2 CY 2023 would be better.
- FII Inflows:
CY 2021 (USD MN) 3716 CY 2022 (USD MN) -16489
- Corporate Earnings Growth:
Source Bloomberg & Edelweiss.
- Selectively positive on Earnings growth. Financial, Industrial, and capital Goods will continue to support earnings growth.
- Market Valuations:
We are at the same market levels as we were in Jan 2022. But Valuations are 13% cheaper. But still, we are NOT the cheapest market in the world, but fundamentally doing extremely well. Short-term FII flows can move to countries like China and Brazil which have been under tremendous pressure for the last 2 years.
This is going to be really BIGG. China is now riddled with a host of issues and most importantly Trust Deficit. China gained a significant share of the global economy in the last 4 decades and has attained the fastest GDP Growth, but this will slow down now and it’s unlikely that CHINA will grow faster than Global growth which average around 3%-3.5% for the last 4 decades.