The Indian Express (Delhi Edition)
‘The environment is very conducive for manufacturing to grow in India rapidly’
Prashant Jain, founder and CIO of 3P Investment Managers, on the recent run of the BSE Sensex, which touched 75,000 points, concerns about valuations and growth prospects. The session was moderated by Sandeep Singh, Resident Editor, Mumbai
On the stock market rally amid global conflicts
I think there is a weak correlation between localised conflicts like the one in Russia and Ukraine. While bigger wars cause pain and social challenges, they increase economic activity.
On the other hand, equities thrive in inflation because they give you real returns equal to the growth of the economy or business plus inflation. Until inflation becomes high enough to impact real growth, I don’t think equity investors need to worry about it. If anything, one of the reasons to invest in equity is because we live in an inflationary world. Post-covid, there has been a significant injection of money in systems across the world. Economic growth has also happened with a vengeance for multiple reasons, possibly driven by revenge consumption to compensate for the lack of investments in those two years. Corporate balance sheets are extremely healthy, both in the Indian and US contexts, as the corporate debt, too, is quite low.
On the Sensex touching the 75,000 mark
The nominal returns may be low but the real returns will be high. Until 2000, India’s nominal GDP was growing at around 15 per cent. That’s because inflation used to range between eight per cent and 10 per cent. For the last 10 years, inflation has been below five per cent. To that extent, I would say the current generation is lucky because they can expect higher real returns and also stand to gain from growing up in a very confident and optimistic India. I don’t think there is any reason for them to be pessimistic at all.
The right way to look at the Sensex or Nifty is never to focus on absolute wealth but to gauge it in relation to the growth of the economy. Every year, we are more optimistic about accelerated GDP growth, which means your GDP each year will touch lifetime highs. So if you do not worry about the economy falling off from a lifetime high every year, then why should the Sensex?
Also, remember that the corporate profitsto-gdp ratio has improved sharply from 1-2 per cent profits-to-gdp in the 1990s to 5-6 per cent profits-to-gdp, meaning profits have grown faster than the nominal GDP. One need not worry about the 75,000 level, or for that matter any absolute level, unless the index has far outpaced the GDP growth in rupee terms or the corporate profits growth, which is not the case right now.
On India’s prospects in manufacturing
Out of 140 crore people, about 60 crore people are part of the workforce, with roughly 10 per cent employed in manufacturing and 40 per cent in agriculture. Manufacturing is key to India and the income levels could be raised if you move people away from agriculture — which sees far lower productivity and accounts for such a large share of labour — to either manufacturing or services.
The environment is very conducive for manufacturing to grow in India rapidly for a few reasons. One, Indian wages (per capita income) are now the lowest across Asian manufacturing countries. So compared to China, Vietnam, Thailand, Malaysia and Indonesia, our wages are the lowest. The second is that multinational companies (MNCS) have learnt lessons from the Covid lockdown in China when supply lines were choked. They now want to de-risk or reduce their dependence on a single country.
Finally, geopolitically, India is doing very well. So every quarter, every month, we hear some announcement from an MNC wanting to set up shop in India.
Over the last 200 years, manufacturing has gone up around the world driven by MNCS. Wherever they choose to locate their factories, that country does well on growth parameters. Suzuki came to India 40 years ago and developed the entire ecosystem of ancillaries. Global companies have the product, technology, reach, brand equity and distribution and have a downstream effect. The good news is that they are now keenly looking at India. Therefore, India’s manufacturing should progress much faster than we have in the past.
Manufacturing and capex (capital expenditure) are long lead items. The period between intent and actual spending on the ground will take two to four years. But if you look at Apple’s progress, India has grown from accounting for 0 per cent to more than 10 per cent of the volume and we continue to grow rapidly. Private capex is reviving, too.
On the global rally for gold
In a note titled “A Sea Change”, US investorwriter Howard Marks explains how the influx of liquidity worldwide after the Lehman crisis (sub-prime crisis that led to the Wall Street crash in 2008) culminated in a massive spike of liquidity. He argues that liquidity in the future will reduce, or at the very least not increase at the same pace. The most important indicator is the US 10-year yield at 4.6 per cent. However, the US debt-to-gdp ratio is very high. The fiscal deficit in the US is running very high and certain countries are reducing their share of reserves in US dollars and buying gold continuously. If the US 10-year yield continues to increase, at some stage it could impact capital markets worldwide and asset prices worldwide.
In my view, India is relatively better placed for two reasons. India’s current account deficit seems to be falling. Our net service export surplus has grown significantly because of rapid growth in the Gulf Cooperation Council (GCC) countries post-acceptance of remote working. Additionally, the intensity of India’s oil consumption as a percentage of GDP has also reduced. With this, our current account deficit is around one per cent and may further improve depending only on FDI. I don’t think India will be impacted much even if US rates increase. Furthermore, the gap between Indian and US inflation has fallen sharply. So has the gap between Indian and US yields. This shows that India can decouple its 10-year yields or interest rate environment with global movements at least to a large extent, if not entirely. Given our reasonably balanced external balance sheet, the impact of a sharp rise in US yields should be limited.
A capital market correction cannot be ruled out if a sharp rise in US yields results in foreigners selling big time. In 2022, markets went up by four per cent but not before going down. I think such corrections, if at all they manifest, should be looked upon as opportunities by locals to participate more. While some volatility cannot be ruled out, I will not expect them to impact Indian markets.