It’s time India participated in global growth

GST effect is normalising and consumption is coming back into the economy

Across the globe, equity markets are trending up and touching life-time highs. While we all know that liquidity has been buoyant due to a low interest rate regime across the world, the rebalancing of asset classes from debt to equity has also contributed to the market moves.

Additionally, we are seeing synchronised growth across the developed and emerging economies, which augurs well for the sustainability of the rally in the equity markets.

The IMF recently upgraded its world GDP growth rate projections to 3.6 per cent for 2017 and 3.7 per cent for 2018, which are slightly above the 10-year and five-year average of 3.5 per cent and 3.4 per cent, respectively.

Analysts believe that these estimates are conservative and the actual numbers could be higher. The most interesting part is that, every year for the past several years, we have seen growth downgrades for the year as we move from one quarter to another. Encouragingly, this year is different and has been experiencing upgrades.

All the 45 countries that the OECD (Organization for Economic Co-operation & Development) tracks will be growing this year. This is happening for the first time since 2007. Apart from 2007 and 2017, it has happened only two more times in the last 50 years — early 1970s and late 1980s.

All major countries in the world, both developed and developing, are posting PMIs greater than 50, which indicates positive sentiment among businesses globally.

The world trade volume in both goods and services is now recovering as indicated by year-on-year growth in positive territory for the last three quarters.

In 2017, China has particularly seen imports clocking double-digit y-o-y growth and exports clocking positive growth for most part of the year. The US has also seen growth in its trade data. All this growth is with absolutely benign inflationary expectations. More than 90 per cent of the OECD countries have unemployment lower than NAIRU (non-accelerating inflation rate of unemployment) level. The core PCE deflator in the US is at 1.2-1.3 per cent, much below the target of 2 per cent. CPI in Europe is at 1.5 per cent and Japan is much below 1 per cent.

With improving economic growth and lower inflation, the world is in a “Goldilocks” scenario which is well suited for equities. Additionally, the producer prices (as tracked through Producer Price Index) are increasing, which indicates pricing power with the companies, which is positive for equities.

At the back of the improving economic activity, corporate earnings across the world are improving as well. The EPS growth forecasts for the markets are being revised. The one-year forward expectation of MSCI indices for the world, developed and emerging markets, is 20-25 per cent (as against de-growth for the last 3-5 years).

Fed, ECB stance

At the same time, we are seeing increasing intent on the part of the US Fed to normalise the balance sheet. The balance sheet of the US has increased five times in six years, from $900 billion in 2008 to $4,500 billion in 2014.

Hence, in view of the economic recovery, it is all but logical to wind it down. The Fed has indicated reducing $10 billion (Treasuries 60 per cent and mortgage-backed securities 40 per cent) every month and gradually increase it to a maximum of $50 billion per month. The ECB has been toying with the idea of reducing its asset purchases by half (from the current €60 billion per month) sometime in 2018 as its balance sheet has expanded rapidly by 2.25 times to $5,100 billion in over two-and-a-half years. Both the Fed and ECB, we believe, will be careful in calibrating the impact on the real economy and financial markets.

It is imperative that India should participate in the global growth. India has had disruptions in the past one year in the form of demonetisation and implementation of GST that has led to growth faltering in various pockets of the economy.

As we normalise from the effect of GST, there is increasing evidence that consumption is coming back into the economy. The government expenditure could continue, albeit at a slower pace than the first half of the year, but with leeway to increase fiscal deficit by 30 bps.

The reversal of rupee strength and prompt remedial measure to pay back input tax credit to the exporters will help revive the much needed growth in this segment, which is facing global tailwinds. If there are no further disruptions, companies could hasten the process of participating in global growth.

The writer is Co-CIO, Aditya Birla Sun Life AMC

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