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The India Story : Don’t use it as an excuse to up your risk

We all strongly believe that India’s(economy) time has come, and it is at an inflexion point. On most parameters, the economy stands out and presents relatively a better opportunity than most major economies. So, have we changed our view to have come up with the headline? The answer is no. It’s important to understand that over shorter to medium the shorter the economy and markets can have different trajectory. Surprisingly, it’s not as well understood as it should be. This post is about reinstating this distinction

Markets & The Economy : Relationship; its complicated

Over long term, most equity markets tend to move in tandem with their economy’s performance. However, as stated earlier, over short, and medium term, that need not be the case. Let’s take a few scenarios:

  • Imagine an economy growing at 7% and expected to grow at similar level in the coming years. However, after couple of years, it ‘slows’ down to 6% growth. Make no mistake, in absolute, this is still a high no for a major economy. However, in all likelihood the equity markets wouldn’t like this and most likely go down
  • Imagine the reverse; an economy growing currently at 2% and expected to continue in similar vein. However, it moves up and starts growing at 3%. No prizes for guessing on how the equity markets will behave
  • There’s a in between scenario, wherein the economy is growing at 6% and expected to grow at & 7% in the coming years. Instead, it continues to grow at 6%. The markets won’t like this either

Like we mentioned before, the idea is not to paint a negative picture on the prospects of the Indian economy. I am equally ‘invested’ in the idea of India (the economy). However, “In war, prepare for peace; in peace, prepare for war.” – Sun Tzu, author, ‘The Art Of War’

  • Don’t let the current equity market’s performance sway you away from your asset allocation (debt : equity allocation)
  • While the debt returns have looked pedestrian in comparison to equity markets in the last 3 years, it’s improving. In all likelihood, over the next 12-18 months; debt returns might be equal/ better than equity (at the risk of sticking my neck out)

Anecdotal evidence

This is a crime, we ourselves have sometimes been guilty of. The overcrowded malls and airports can give that impression of a robust Indian consumption. There is no doubt that there is some truth in that. However, in Q3 of 22-23, India’s GDP was 4.5 %.

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