#3rdMAW 2023 – Economy and Market Outlook

Introduction

Prashant Jain, a stalwart with more than three decades of experience in the Indian equity market, recently delivered a keynote speech at “Master’s At Work”, held at Kolkata, that offered invaluable insights into the Indian economy, market dynamics, and potential investment strategies. With a successful career at HDFC Asset Management Company Ltd., Prashant Jain’s wisdom is highly regarded in the investment community. Below are the key points from Mr. Jain’s speech.

Indian Economy: A Continual Evolution

1. Same Old Talks, Nothing Changes Broadly in Economics: Mr. Jain began by emphasizing the cyclical nature of economic discussions. Despite changing circumstances, he noted that some fundamental economic principles remain constant.
2. Four Decades of Real GDP Growth: India has witnessed remarkable economic growth, even during challenging times like the Lehman financial crisis in 2008-2009, where real GDP growth hovered around 5%. This resilience reflects the nation’s economic potential.
3. Sub-5% Inflation Post-2014: Jain credited India’s economic stability and low inflation rates to improvements in the supply chain, infrastructure, increased efficiency, and heightened competition.
4. Low Gap Between US and Indian Rates: Currently, the interest rate differential between the United States and India is at its lowest, standing at less than 3%. This low gap can positively influence investment opportunities in India.

Market Dynamics: Insights for Investors

1. Long-Term PE Impact on Returns: Mr. Jain debunked the myth that long-term market returns are significantly affected by changes in price-to-earnings (PE) ratios. Instead, he stressed that operating margins play a more substantial role in shaping market returns over a medium-term horizon.
2. Expectation of Nifty CAGR at 12% Long Term: Jain expressed his optimism for the long-term growth of the Nifty index, projecting a Compound Annual Growth Rate (CAGR) of 12%.
3. Rising Working Age Population: India stands out as the only country where the working-age population is expected to grow for the next two decades, offering a favourable demographic dividend.
4. Rise of Offshore Desk Jobs: Post-COVID, offshore work in non-IT services has been on the rise, indicating India’s adaptability to global changes.
5. Favourable Wage Inflation: India’s wage inflation remains competitive when compared to counterpart countries, making it an attractive destination for businesses.
6. Market Share Gains in Manufacturing and Services: India has the potential to gain market share in both manufacturing and services industries, positioning itself as a global player.
7. Diversified Supply Chain: In light of the Ukraine conflict and China-Taiwan tensions, Mr. Jain highlighted the case for diversified supply chains for global companies, making India an appealing alternative.
8. The Power of Digitalization: Jain underscored the transformative potential of digitalization, coupled with a better tax regime, strong corporate balance sheets, and a robust borrower profile, which could lead to a 7% real GDP growth rate.
9. Reasonable Forward PE: With a current one-year forward PE ratio of 18, the market appears reasonably valued.
10. Domestic Flow of Savings: In 2022, the Indian market remained resilient in the face of aggressive Foreign Institutional Investor (FII) selling, largely due to strong domestic savings inflows, totalling 3 lakh crores per annum.
11. Better Risk-Reward for Large-Cap Companies: Mr. Jain suggested that the risk-reward profile currently favours large-cap companies.

Risks and Challenges

1. Sharp Rise in US Yields: A sudden and substantial increase in US yields could pose a risk to Indian equity markets.
2. War Escalation: Ongoing geopolitical tensions and the escalation of conflicts can disrupt the global economic landscape and slow down growth.
3. Global Economic Slowdown: India’s fortunes are closely tied to the global economy, and a significant slowdown in global growth can have repercussions domestically.
4. Higher Crude Prices: Elevated crude oil prices can impact India’s trade balance and inflation.
5. Supply of Equities: The supply of equities, including promoter sell-offs, IPOs, and investments by private equity firms, could influence market dynamics.

Investment Strategy and Lessons Learned

One notable aspect of Mr. Jain’s speech was his reflection on his investment career. He acknowledged that he had faced losses in nearly 113 out of 445 stocks he invested in. A common thread among these losses was the presence of “Weak Business.” This highlights his emphasis on the sustainability and strength of a business when making investment decisions.

Additionally, Mr. Jain advised investors to think in terms of good and not-so-good companies rather than categorizing them as public or private. He maintained his bullish view on the largest Public Sector Undertaking (PSU) banks, suggesting that there is potential for growth in this sector.

Conclusion

Prashant Jain’s keynote speech provided a comprehensive overview of the Indian economy and market dynamics, offering valuable insights for investors. His extensive experience and successful track record in the Indian equity market make his perspectives particularly noteworthy. As investors navigate the ever-evolving landscape of the Indian market, the wisdom shared by Mr. Jain serves as a valuable guidepost for making informed investment decisions in this dynamic and promising economy.