There’s no doubt that India’s economic cycle is in an upswing - led by political reforms and as the world finds a China alternative in India.
The upward trend becomes more pronounced when compared to what’s happening globally. Just last week, Fed and BoE both increased rates by 75 bps.
While the Fed doesn't expect rate hikes to stop anytime soon, the UK economy is posed to enter a period of a prolonged downturn.
India, on the other hand, continues to grow with surprising strength. Higher rates and higher inflation don't seem to be affecting economic activity and consumption.
The markets too don't seem to be affected by what’s happening globally, and rose 2% last week, having gained a total of 5% last month.
We see two key risks to the direction of the markets:
Strength: The more resilient the Indian economy and the data associated with it, the more room RBI has to increase rates. Inflation control and currency weakness give the RBI reasons to keep upping the rate game, like other central banks.
Valuations: India is now trading at a 15% premium to the US markets, and is the most expensive market amongst emerging economies. Moreover, the premium that India is trading at compared to other Asian markets is currently at its highest.
💡 Our view: High valuations in a shaky environment make the risk-reward equation unfavourable. We are hence negative on the markets in the near term, while being stoked about the long-term prospects. Buying on dips is the strategy we’re sticking to.