Chief Economist at the National Stock Exchange of India
Global markets completed a hat-trick of positive annual returns in 2021; the Indian market’s 24.1% return was the best in four years, even as the Omicron variant of the Coronavirus spread like no other. Our sanguine expectations on this variant from the last month’s Market Pulse have been only partially realised, however. Overall caseload in India continues to remain well above 250,000 daily, just shy of the Second-wave peak, but with a fraction of the deaths (~570 now vs. 4000 then). However, the sheer spread of the variant is high enough to push casualties up—deaths remain on an upward trend. Unlike the last time, the spread is very different across states this time. A similar phenomenon is also being seen globally, where the daily caseload at 3m+ is over 3x the second wave. Daily casualties remain substantially lower but are on a rising trend. What’s more, substantial divergence remains across countries. The new year—third in the pandemic—allows us to pause and reflect on the macro environment likely in 2022. Growth is likely to turn less conducive after two years with rising rates (IMF estimates 2022 growth to be 4.4% vs. 5.9% in 2021), with vaccine shortages (and inequity) likely to continue across large parts of the world.
The geopolitical environment has also warmed up, on tensions with Russia in Ukraine. In a panoply of charts, our Story of the Month lays the global macro background, complete with indicators across multiple sectors, and then proceeds to build an outlook for the Indian economy in FY23. The last word on the pandemic remains to be said, but markets have woken up to the reality of life after it. Capping a sterling 2021, when the MSCI World Index rose 20.1%, January has been a reality check. A trifecta of rising expectations of rapid monetary tightening amid high and rising input costs across the board, expensive valuations and geopolitical tensions have roiled markets. Developed market equities are down 7-8% YTD, while EM equities have extended last year’s losses.
Closer home, market benchmark NIFTY 50 is down 0.4% (As of January 25th, 2022). FIIs remained net sellers of Indian equities for the third month in a row in December, with net outflows at US$2.5bn—the highest monthly outflows since March 2020, translating into net outflows of US$3.9bn in FY22 thus far (Apr-Dec 2021). Fixed income markets reflected similar worries, with short-term yields rising in anticipation of the change in monetary policy stance, while the long end of the curve remained sensitive to lingering growth concerns. The Union Budget FY23 would be presented within a week, on February 1st, and for a reflective market, also happens this time to be closer to elections in five states. Our Chart of the Month takes a closer look at historical data since 1997 and finds that while equity indices have tended to be range-bound about the Budget, with a decline in volatility.
Could this time be different? On the macro front, The CSO’s advance estimates for FY22 at 9.2% is marginally lower than our 9.5% and expects overall output to surpass pre-COVID levels this year. While private consumption continues to lag, investment growth at 15% is good news for a sustained recovery. Nominal GDP—important for budgetary calculations—is pegged at 17.6%, meaningfully higher than the budgeted 12.9%. Growth seems to have lost some momentum in the second half, particularly in contact-intensive services, possibly reflecting the impact of rising Omicron spread and renewed restrictions as well as persistent supply-side bottlenecks. Meanwhile, retail inflation continues to rise., up 70bps MoM to 5.6% in December, with core inflation staying put at 6.2%. The trade deficit in December remained high at US$21bn, but with both components higher.
Apart from these we also have on current account deficit (expect 1.6% of GDP for FY22) and the fiscal deficit. There are four papers in the Insights section, two from the NSE-NYU Conference 2020. The first paper by Kalimipalli, Marisetty and Ramachandran offers a sobering assessment of capital infusion into public sector banks. Based on data over the period 2008-19, the authors rule out unequivocal evidence of such infusions lowering the systemic risk in these banks. The second paper by Gatchev, Seth, Singh and Vishwanatha finds a reassuring drop in price variability of IPO stocks after price limits were introduced by SEBI in 2012. A highly cited paper Sensoy (2009) considers the need for ideal measures of fund performance, with results that over 30% of diversified US MFs had a mismatched benchmark in their prospectus (then), potentially aligned with fund managers’ incentives to improve cash-flows. The last paper by Kozak, Nagel and Santosh take a bold step towards characterising stock market returns, but not through the standard three- or four-factor return models, with a bevy of models to estimate the stochastic discount factor (SDF) coefficients for models with many (50+) factors. Our theme of this month’s Pulse is life after the pandemic. The central banks seem to have woken up to the reality of high-inflation post-pandemic world, with implications for both monetary policy and growth.
Overall debt levels across the world have shot up in addition, thanks to the liberal fiscal stimuli. India’s relatively fiscally conservative stance, coupled with easy monetary policy has worked well thus far. As seen in the CSO’s estimates, however, our PFCE (that’s Private Final Consumption Expenditure) remains anaemic. That needs to change going forward for the fledgling recovery to sustain; the Union Budget FY23 might just act as the catalyst here.