India, 10 things I hate about you in 2022 and 5 things I worry about you for 2023!

10 things I hate about you. It's one of most famous Romcom from late 1990s. In one of the prime scenes in the movie the female lead (Kat) reads a poem with the same title, 10 things. She shows her superficial irritation with each sentence of the poem which in reality is her admiration and acknowledgement of love to the male lead. First of each sentence in that poem is anaphora which ironically starts with "I hate".

The situation of FIIs so far in 2022 is similar to Kat. In this adaptation, an FII highlights "10 things she hates about India". Again, superficial irritation and ironic admiration of what India and Indian market has demonstrated in 2022, one of the most difficult year in the global asset allocation context. Its noteworthy that going into 2023, investors sentiment and preference remains most negative for India amongst all markets in Asia Ex Japan (chart courtesy: BoAML)

So here is an FII’s anathema cum eulogy for India and Indian markets at the fag end of the year!

I hate when you turn out to the fastest growing major economy in the World by a wide margin, growing 6.8% in real terms in 2022 (IMF). You are contributing (record) over 25% of incremental GDP growth for entire EM complex!

I hate when you outperform other equity markets by a huge margin. In 2022 (YTD), when global equities are down 17% and EM equities are down 22%, you are up 5% in most brutal risk off phase in the post pandemic World.

I hate it when you demonstrate relatively least amount of volatility in global fixed income and currency markets. INR turned out to be resilient and least volatile currency in a year when US$ was on rampage and oil touched 140 $ a barrel. The spread between Indian Gsec yield and US Gsec yield narrowed to multi year level and Indian Gsecs bond market didn’t give negative returns when the World saw biggest fixed income carnage in history. I hate it when people opine that India’s country risk premium was overstated in the pre Covid World!

I hate to see your listed Corporate earnings nearly doubling since March 2020 (Nifty EPS in FY20 was 432 and consensus expects FY23 EPS at 830). With your next fiscal earnings are also expected to deliver 15%yoy, I regret to see India’s listed Corporate earnings to GDP rising well above 4% in FY23 and sustaining there from below 2% in pre Covid period. I also hate to see extraordinary broadbasing of your earnings in last 3 years!

I hate to see how your share in MSCI EM index jumped to over 15.8% from single digit just a decade ago. This is despite record FII outflows in 2022. I hate to see the might of Indian retail investors who have stirred the debate of India’s decoupling from the rest of the World.

I hate to see when whole World is worried about supply chain and deglobalization issues your merchandise exports share in global exports increased by 40 bps to 2.37%. Your share in global services exports have only strengthened in 2022. I hate to see when people think of you as a strong contender to gain from China +1 (and now even Europe +1) theme in the years to come.

In a year when lettuce won over incumbent Government, when political turmoil has been roiled up across the globe, where regime shifts happened across the board including led by bond vigilantes, I hated the political stability that you demonstrated in perhaps the most troubled year in a post World war period. I hate when I see clear bias of Western media against you and yet you and your democracy prove the naysayers wrong!

I hate it when the World Bank says that India is expected to receive a whopping $100 billion in remittances in 2022. The next biggest recipient is expected to be way behind at $60 billion. This comes very handy to you to manage your BoP.

I hate it how you showed the World a pandemic should be managed despite limited resources. India has so far administered 220 crore covid vaccine doses. Unlike many other countries where Covid cases are still rampant and still straining healthcare system and economy, Indian active covid cases have reduced to negligible level (less than 4000).

I hate it when people talk about giant leap India has taken in digital infrastructure. JAM trinity was a success before, but significant progress has been made in 2022. For e.g., more than 7 billion UPI transactions count are now seen every month. I hate to see how top sell side firms forecasts tech led immense productivity gains for India.

Now why the FIIs are worried about India? There are few genuine risks which they worry about. On their behalf, I have "5 things to worry about you" to highlight! Here they go..

I worry when I look at your external sector situation. Decoupling of economy means your trade deficit may remain sticky and elevated for sometime. I worry how tightening of global financial conditions would impact funding of your current account deficit.

I worry that in a year going into elections there could be fiscal slippage. Households net financials savings are already under pressure so I worry about the funding of combined federal level fiscal deficit and its impact on India’s financial conditions.

I worry when I see real rates turning positive and moving reasonably higher in the coming year. Low real rates have supported economic recovery and market uptrend. What if real rates sustain above 150 bps in 2023, I wonder!

I worry about recession risks in global economy led by develop markets in 2023. How prolonged that downturn be and what implications it will have on India’s GDP and Corporate earnings growth. The risk of global policy mistake and its impact on flow of funds towards India worries me.

Last but not the least I worry about India’s rich valuations. India’s valuations premium against its own history and versus against EM peers is near record high levels. I worry despite all your cyclical and structural superiority you can sustain such premium!

Overall in relative terms, 2022 turned out to be a landmark year for India. Truly coming of age year for India in global macro and market context. However, as we enter 2023 some of the relative attractiveness may be challenged. For every optimist there is pessimist there is a pessimist on India at this point. What we know that India consistently disappoints both the optimists and the pessimists. Therefore for a median investor it would be wise to cut the noise and stay invested for long term assuming well that the road could be bumpy. The advice for the coming year and ahead would be same. Focus on asset allocation. Focus on destination but try to smoothen your journey by appropriate asset allocation.?