'One-trick' ponies – US, India and China markets are rallying on single narratives, investors need to be cautious, say experts

• Equity markets in India, China and the US have witnessed a rally in the last one month.
• According to market experts, this rally is based on a single “narrative”, and hence investors need to exercise caution.
• More specifically, analysts point out that the rally in India is driven by the growth narrative, which looks ‘feeble’.

Equity markets in India, China and the US have been rallying over the last one month, but each for a different reason – India on hopes of growth, China on expectations of exit from zero-Covid policy and the likely pivot in the US Fed’s monetary policy is pushing the US markets. Market experts advise caution since these rallies are all based on singular narratives for each market.

Over the last one month, India’s benchmark indices Sensex and Nifty50 have risen 2.2%, scaling new all-time highs in this period.

On the other hand, Hong Kong’s Hang Seng index has surged 16.4%, while the Shanghai Composite added a more modest 4.2% to its value.

US equity markets, too, have rallied after bears and bulls locked horns in the months before – while the S&P 500 gained 5%, the Dow Jones Industrial Average added 3.4% to its value in the last one month. The tech-heavy Nasdaq also bounced back, with gains of 6.4%.

On an average, stock markets in a basket of key developed markets (MSCI World) posted an increase of 7% in this period, according to an analysis by Kotak Institutional Equities.


In comparison, the MSCI Emerging Markets (MSCI EM) index, which is a basket of key developing markets including China, India, Brazil, Mexico, Malaysia, among others, registered an increase of 15% in US dollar terms.

Leading the growth in the MSCI EM basket were China, Taiwan and Korea, while India registered an increase of 6% in US dollar terms.

However, the rally in equity markets, both in the developed and the developing world, has been driven by singular “narratives”, according to a report by Kotak Institutional Equities.

“We attribute the recent strong move in global markets to specific ‘narratives’ in various markets – China’s exit from its zero-Covid policy over the next few months, strong growth in India, and the US Fed’s pivot on its monetary policy, with peaking inflation in the US,” the report said.

While the experts believe that China’s zero-Covid policy relaxation, and US Fed slowing down the pace of rate hikes are possible, they say that the growth narrative of India leaves them “perplexed”.

GDP growth cuts, limited scope for earnings upgrades – India’s growth story looks ‘feeble’

Indian equity markets have been one of the best performers amongst major economies. The key drivers have been India’s GDP growth and inflation levels that are relatively better than its rivals.

However, according to the Kotak report, this rally is on feeble grounds, given that the three-year macro and micro data suggest that the growth is fairly muted.

The 2QFY23 GDP increased at a 3-year CAGR of 2.5% on a weak pre-Covid base, the report said.

For context, India’s Q1 GDP in real terms came in at 13.5%, while Q2 GDP growth stood at 6.3%. India has also seen a spate of cuts in GDP growth forecast, with the new projections for 2023 now ranging from 4.8-6.9%.

“We remain cautious on India’s growth prospects as the global demand risks slowing down and lagged impact of domestic monetary policy actions. GDP growth in FY2023 is likely to be in the range of 6.5-6.8%,” said Suvodeep Rakshit, Chief Economist, Kotak Institutional Equities.

Weak consumption and delayed rural recovery

Consumption, too, witnessed weakness, with a compounded annual growth rate (CAGR) of 3.2% between Q1 FY20 and Q1 FY23, which is the slowest in the past nine quarters.

“We see limited scope of earnings upgrades given the backdrop of weaker-than-expected domestic economic recovery,” the research firm added further.

The consumption weakness also reflected in auto sales in November – the sales were muted not only on a sequential basis, but also over the longer term, according to Kotak.

“The Indian automobile sector is a classic example – multiples are near all-time highs, whereas volumes have been fairly disappointing on a longer-term basis,” the report added.

According to a Motilal Oswal report, rural consumption trends still remain weak, lagging urban spending for the sixth consecutive quarter. Going forward, too, rural spending is expected to remain a mixed bag.

Earlier, analysts polled by Business Insider India recommended investors to deploy a ‘buy on dips’ strategy, given the turbulence and uncertainty in global markets.

“In this context, the current setup is a ‘Buy on Dips’ market. We recommend investors maintain good liquidity (10%) to use such dips in a phased manner to build a position in quality companies and with an investment horizon of 12-18 months," said Axis Securities in a research note.

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