GDP growth estimated to cross 7%, what’s in it for the markets?

Markets now

The Sensex, which usually follows Wall Street, fell to 62,428.54; the NSE Nifty lost 0.25% to fall to 18,487.75 on Thursday. Indian markets are up by only 2.6% so far in the calendar year 2023, while the Dow Jones at the New York Stock Exchange is down 0.68%.

The seasonally adjusted S&P Global India Manufacturing Purchasing Managers’ Index (PMI) rose to a 31-month high to 58.7 in May from 57.2 in April. The increase was on account of the remarkable strength demonstrated in demanding conditions — leading macro indicators like GST collections, FPI inflows, PMI data, credit growth, and strong Q4 GDP numbers suggest a resilient economy. However, the macro numbers have failed to improve sentiment as global concerns remain, an analyst said.

Global factors

US DEBT CEILING: The Republican-majority House of Representatives passed the debt ceiling bill in a bipartisan vote on Wednesday night; the Senate must now move quickly to beat the Monday (June 5) deadline to avert default on the country’s $31.4 trillion debt.

Despite the progress in Congress, however, bulls have faced difficulties. This suggests concerns over the potential impact of the deferral of the federal debt limit for two years — allowing the government to borrow without restrictions to pay its bills — on global financial markets.

Investors are cautious, anticipating inflationary pressures in the US after the deal on the debt ceiling. With the US 10-year bond yield rising, the market is looking at the trajectory of US interest rates, Vinod Nair, Head of Research at Geojit Financial Services, said.

CHINA FACTORY ACTIVITY: The decline in Chinese factory activity could lead to apprehensions among investors regarding the overall health of the global economy, said Prashanth Tapse, Senior VP (Research) at Mehta Equities Ltd.

The decline in May was faster than expected on weakening demand, putting pressure on policymakers to shore up a patchy economic recovery and pulling down Asian financial markets. China’s official manufacturing PMI fell to a five-month low of 48.8, the National Bureau of Statistics (NBS) said on Wednesday, down from 49.2 in April and below the 50-point mark that separates expansion from contraction. China’s decline will have ramifications on emerging economies like India.

Are FPIs back?

Foreign portfolio investment (FPI) flows into India reached a nine-month high of Rs 48,330 crore (around $ 5.85 billion) in May. Sustained buying by FPIs lifted the indices by more than 2% in May. India is among the best performing markets, while others, both developed and emerging, are struggling. FPIs have been buying across sectors — automobiles, capital goods, health care, oil & gas, telecom, and financial services, particularly banking.

While FPI flows are likely to continue supporting the market, there is no scope for a sharp rally since valuations are not favourable at record levels. There is concern that rising valuations might nudge domestic institutions to sell, thereby neutralising the buying by FPIs.

Also, the FPI “hot money” can exit faster than it enters. FPIs had pulled out more than Rs 2 lakh crore between January and June 2022, upsetting the calculations of Indian investors.

Outlook on markets

Based on several pointers to a resilient economy, market experts are willing to bet big on India’s upcoming manufacturing story. Many feel that the markets, though not cheap, are reasonably valued and could hit new highs in the coming months.

A leading market and economy expert said that while broadbasing of offshoring will bring benefits, it is manufacturing that can push economic growth significantly. “Manufacturing has far more potential than services to provide a fillip to the economy. India’s wage inflation has been among the lowest over the last 10 years, and that provides major cost competitiveness. The economic outlook looks very strong. The only big worry is the Russia-Ukraine war,” the expert said.

Other experts said that GDP growth data are historical and the markets are forward-looking, so it is wrong to expect an immediate reaction to these numbers.

“It is, however, important to see that ours is the only market that has witnessed strong inflows and performed well over the last one month. It has also witnessed broader participation,” Pankaj Pandey, head of research at ICICI Securities, said.

“Our markets are headed towards new highs. Sectors whose growth is aligned to the global economy may witness a lag, others that are more domestic in nature and driven by local factors will do better,” he said.