Dear Advisory Client,
Equity markets globally are at record highs on the back of hopes over US-China trade deal, corporate results in US coming in better than expectations and low global interest rates. Sensex & Nifty are trading at record highs on government measures to boost the economy including tax cuts and sector specific boosters and also RBI lowering rates to close to all time lows and keeping liquidity high in the system.
India is witnessing a demand slowdown in consumption and this is driving down investment demand. The economy is also going through a credit freeze with markets frozen to all but a few borrowers. Hope is that the government and RBI measures to boost the economy and easing of global risk aversion on a trade deal between US and China will spur economic growth and take it back to levels of 7% against 5% levels seen in the first quarter of fiscal 2019-20.
Growth returning closer to trend would mean worst is over for markets and corporate earnings would rise on improved demand in the economy leading to higher revenue flow for the government through taxes and macros can start to look better.
This is a scenario that is best for investors and for worriers of the market like me.
However, i have a nagging feeling of the fact that the worst is yet to come. The reason is that there is a global demand slowdown with revenues and earnings growing much lower than what they were 5 years ago, except for a few companies. China the biggest driver of world demand is growing at 6% levels, which is decades low. Even if demand picks up, trend growth will nowhere be close to double digit levels seen in in the 2000-2010 decade.
On the domestic front, both the centre and states are fiscally strained while the top corporate houses are highly leveraged. There is no room for more leverage and this will hurt investment demand. As far as consumers go, job stability and job creation are an issue as most sectors are either seeing downturn or winding down leverage.
My worry is where will demand come from for growth? Until we see a firm demand uptick led in specific sectors, it will be difficult to say if the worst is over.