Early Signals Through Charts

NETRA Aug 2023

Global Growth Slowdown, Valuations & Opportunities
Global Growth: Advance Economies On Verge Of A Slowdown
Services Consumption Lags Manufacturing, But They Don’t Diverge for Long Lending standards tightening – a lead indicator for credit slowdown
15 -40
4.0 2001 GFC
61 recession -20
10
3.0 58 0
55 5 20

% YoY
(%, YoY)

2.0

%
52

(x)
0 40
1.0 49
US 60
46 -5
0.0 recession? 80
43
-1.0 40 -10 100
Dec 01 Aug 05 Apr 09 Dec 12 Aug 16 Apr 20 Dec 23 Jun 94 Jun 99 Jun 04 Jun 09 Jun 14 Jun 19 Jun 24
US real services consumption (%, YoY) US manufacturing PMI (advanced by 6months, RHS) US Banks loans and leases Bank lending standards (RHS, inverted, advanced by 12 months)

Excess Savings in US Are No More Available, This Can Drag Consumption Growth in EU is Also Likely To Remain Lacklustre As Credit Growth Slows
20
6000 5
10
5000 3
Savings running 0

(%, YoY)
4000
(USD bn)

below trend 1

(x)
3000 -10 -1
2000
-20 -3
1000
0 -30 -5
May-17 May-18 May-19 May-20 May-21 May-22 May-23 Jun 11 Jun 13 Jun 15 Jun 17 Jun 19 Jun 21 Jun 23
Household Savings (USD, Billions, SAAR) ECB bank lending survey (advanced by 12 months) Euro area bank loans
Source: FRED, Bloomberg, Nuvama, DSP Data as on June 2023
Global Growth: Chinese Growth Is Also Faltering After Reopen Uptick
Industrial Profits In China Are Slipping As Disinflation Continues Chinese Credit Growth Is Running Close To Multi-Year Lows
15
100 15
14 13.8 13.8
10 13.5
50 13
5 12.6 12.6
12 12.1
0 11.7
0
-5 11
10.7
-50 -10 10
Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Jun-21 Jun-22 Jun-23 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Mar-22 Mar-23
China Industrial Enterprises Total Profits (yoy,%) China PPI (yoy,%) (RHS) China All-system Financing Bank Loans Growth Rate (yoy,%)

Retail Sales Are Once Again Weakening Indicating Eco Drag From HH Consumption Petroleum Products Usage, An Important Concurrent Indicator Is Soft
40
40
30
30
20
20
10
10
0
0
-10
-10
-20
-20
-30
Jun-17 Jun-18 Jun-19 Jun-20 Jun-21 Jun-22 Jun-23
China Retail Sales Value YoY - Last Price
6 per. Mov. Avg. (China Retail Sales Value YoY - Last Price)
China Retail Sales of Petroleum & Related Products (yoy,%)
Source: Bloomberg,, DSP Data as on July 2023
 Global Growth: Headline Inflation Has Reversed, Core Inflation Likely To Fall As Growth Slows

Canada France Germany Italy

9
7
7 11
6 7
5 9
5 4 5 7
3 5
3 3
2
3
1 1 1
0 1
-1 -1 -1 -1

Canada Total Inflation Canada Core Inlfation France Total Inflation France Core Inlfation Germany Total Inflation Germany Core Inlfation Italy Total Inflation Italy Core Inlfation

Japan UK USA G7
4 10 10 8
3 8 8 6
2 6
1 6 4
4
0 4 2
2
-1
2 0 0
-2
-3 0 -2 -2

Japan Total Inflation Japan Core Inlfation UK Total Inflation UK Core Inlfation USA Total Inflation USA Core Inlfation G7 Total Inflation G7 Core Inlfation

Source: IMF, DSP as on July 2023

Global Slowdown: Can Hurt India’s Services Exports And Growth

53%
India net services exports has risen at a faster pace than nominal
India’s annual net services exports are now 44%
nearing $120Bn and gross services exports are GDP. It’s contribution to domestic growth is also high.
$250bn on a rolling twelve-month basis. On a
nominal GDP size of $3.5trn gross services 25%
19.9% 22%
exports are nearly 7% of GDP. 18% 18.4%
14.4% 15%
13.8% 15% 16.1%
13.0% 11.0% 11.8% 11.0%9%
10.5% 10.6% 9%
6% 6.4%5%
Over the last three years, net services exports 1%
have grown at a faster clip than nominal GDP -1.4%
and hence now contribute more to India’s -3%

growth. This contribution is up from 2014-2019 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23
average of 30bps to now 1.5%.
Nominal GDP growth % YoY Net Services exports growth (% YoY, rhs)
In case of a global slowdown, India’s services
exports growth is likely to be slow. This can have 1.5%
a sobering impact on India’s growth and on 1.4%
Services exports now contribute more than 1% to India’s
India’s core inflation. We believe that this risk is
growth. A global slowdown can hurt this contribution.
not appropriately priced in. In the next two 0.9%
quarters, this will become an important 0.7%
parameter to watch, especially if developed 0.5% 0.5%
0.4%
economies undergo a sharp slowdown. 0.2% 0.3% 0.3%
0.2%
0.0%
Domestic growth would have to take the baton,
and it can. -0.1%
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23
Contribution to Nominal GDP growth (% YoY)

Source: CMIE, Bloomberg, Investec, DSP Data as on July 2023

But India Continues To See Steady Growth, So Far…
100.0 2.0 22
GST collections are healthy, although E-way bill Volume of petroleum products sold is robust.
90.0 1.8 20
80.0 generation has begun to consolidate. 1.6
70.0 1.4 18
60.0 1.2
50.0 1.0 16
40.0 0.8
14
30.0 0.6
20.0 0.4 12
10.0 0.2
0.0 0.0 10

Apr-18

Jul-18

Oct-18

Apr-19

Jul-19

Apr-20

Jul-20

Apr-21

Jul-21

Oct-21

Apr-22

Jul-22

Apr-23
Jan-19

Oct-19

Jan-20

Oct-20

Jan-21

Jan-22

Oct-22

Jan-23
Total E-way bills (Nos. in Million) (LHS) Goods and Services Tax (Rs. Trillion) (RHS) Sales: Petroleum products (Million Tons)

6010 60 Business activity and sentiments are robust

Electronic toll (including Fastag) collections 58
indicate brisk economic activity 5010 56
54
4010
52
3010 50
48
2010 46
44
1010
42
10 40

E-toll collection (Rs. Crores) IHS Markit PMI for Manufacturing IHS Markit PMI for Services

Source: CMIE, DSP As on July 2023

India’s Inflation Trajectory Is Benign But Vulnerable To Change in Food Prices
10 UK
With almost half of the CPI basket comprising Size of the bubble: GDP per Capita (current US$)
food items, any price changes in this category
have a substantial effect on the overall inflation

Food imports (% of merchandise imports)

9
rate in India. So, even small fluctuations in food France China
prices can have a significant impact on the cost
of living for the average Indian consumer.
Some food items, especially essentials like 8
vegetables, grains, and dairy, tend to have
relatively inelastic demand. This means that
changes in their prices lead to disproportionate
changes in overall spending, as people cannot 7
easily reduce consumption even if prices Germany South Africa
increase. As a result, food inflation can quickly
affect household budgets and lead to
decreased purchasing power. 6
Mexico Argentina
Although RBI usually sees through any transient USA
food price changes, but a series of supply side
disruptions can raise inflation expectations. India has a disproportionately
5
higher share of food in
For now, India remains insolated from any Brazil inflation basket.
major food price upward spiral, but this is
something to be monitored in case supply side India
challenges resurface. 4
0 5 10 15 20 25 30 35 40 45 50
Weight of food articles in CPI Basket (%)
Source: IMF, CMIE, DSP Data as on July 2023
World Equities Have Diverged From Liquidity Squeeze, Can This Correct in H2 2023?

Return of Foreign portfolio inflows and a potential

When Central Banks inject funds into the banking
system by purchasing bonds, it facilitates easy 55% improvement in India’s trade balance is likely to increase the
access to money. This also helps equity markets to demand for the Indian Rupee and lead to a more benign
rally. The most likely reason is that expansionary & 45% financial condition in India.
easy monetary policy has been able to increase
the price to earnings ratio for stocks in addition to
aiding better economic growth. 35%

Over the last few quarters, the G4 central banks Equity rally has
have taken a U-turn. US Fed, Bank of England, ECB 25%
diverged from
have continued to raise rates and are no longer liquidity squeeze
infusing liquidity but are reducing their balance 15%
sheet size, meaning, are sucking out liquidity.
In the next few months, G4 Central banks are 5%
likely to reduce the system wide liquidity even
further. The strong H1 2023 performance by many
global equity markets could come under threat of -5%
a correction.
-15% Divergence & catch-up
The divergence in equity rally and a likely
reduction in Central Banks liquidity is a key
monitorable. -25%
Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Jun-21 Jun-22 Jun-23
G4 Central Bank Balance Sheet (yoy, %) MSCI World Index (yoy,%)
Source: Bloomberg, DSP Data as on July 2023
Caution: Recent Nifty Rally Of 5 Months Consecutive Positive Close Has Stretched Valuations
4
Nifty has rallied more than 12% over the last
five months, stretching the index's short-term 28 4
momentum readings and valuations, and
attracting strong FPI inflows. In fact, FPI inflows 3
in this financial year (Apr-Jul 2023) have
20 3
reached $18 billion, making it one of the fastest
4-month inflows by FPIs ever. 2
Earnings growth, economic resilience, and 12 2
investment flows continue to support Indian Jun-09 Jun-11 Jun-13 Jun-15 Jun-17 Jun-19 Jun-21 Jun-23
equities, but short-term upward moves could
be blunted by momentum boundaries and Price Earnings Ratio (LHS) Price to Book Ratio (RHS)
stretched valuations.
With the Nifty Index's 200-day average now
surpassing the 18,200-index level and
accompanied by a rising EPS trajectory, it
presents an appealing opportunity for equity
investors to consider increasing their equity
allocation within the range of 18,200 to the
previous life highs of 18,600 index level. If the
index approaches these levels, it may be Trade deficit is now reducing from record levels
prudent to review the outlook and consider
staggered purchases for equity allocation.

Source: Bloomberg, DSP Data as on June 2023

A Correction Within A Larger Uptrend? Be Conservative For Now!

USA Japan UK Canada France Germany China India Brazil S. Korea Taiwan

Most global equity markets have experienced a 2019- Current

de-rating of valuations over time, particularly
PERFORMANCE 41.8% 40.0% 1.2% 20.8% 23.6% 21.8% -26.7% 61.4% -24.6% 21.8% 38.1%
after reaching their peak in 2021. However,
Indian equities have witnessed the most EPS 37.1% 37.5% 25.8% 34.8% 37.3% 64.6% -8.9% 69.1% 25.5% 26.1% 58.3%
significant earnings growth compared to other
major economies, resulting in a shallower de- RE-RATING 4.7% 2.6% -24.6% -14.0% -13.7% -42.9% -17.8% -7.7% -50.0% -4.3% -20.2%
rating of their multiples.
2014-2019
In relative terms, the trajectory of earnings
growth in India remains healthier than that of its PERFORMANCE 54.8% 19.8% 15.9% 15.0% 43.2% 35.1% 26.4% 48.6% 18.3% 37.8% 43.0%
peers. As a result, Indian equities are likely to
experience a correction within a broader EPS 39.4% 17.6% 17.3% 21.2% 26.1% 19.4% -6.0% 24.1% -0.4% 13.0% 11.5%
structural bull market.
RE-RATING 15.5% 2.2% -1.5% -6.3% 17.1% 15.7% 32.3% 24.5% 18.7% 24.9% 31.5%
On the other hand, other markets, especially
the US and Japan, may be more susceptible to 2009-2014
deeper corrections due to their high valuation
multiples and the persistent issue of narrow PERFORMANCE 84.7% 48.5% 21.3% 22.2% 10.3% 64.6% 7.9% 59.6% -50.9% 13.1% 20.0%
market breadth.
EPS 60.2% 93.1% 9.5% 10.1% 2.3% 74.2% 61.8% 72.5% -46.2% 36.3% 38.7%

RE-RATING 24.5% -44.5% 11.8% 12.1% 8.0% -9.6% -53.9% -12.9% -4.7% -23.2% -18.7%

Source: Bloomberg, Investec, DSP Data as on July 2023

Indian IT Stocks Still Vulnerable To Vagaries of West, Margins
IT* Sector EPS growth has slowed. Valuations, although lower than FY23 peak,
40 remain well above pre-covid averages. 45
30 40
Nifty IT Index is down 25% from its peak Jan’22 35
but is up about 4% in 2023. The sector has 20
30
oscillated between not so bad financial results 10
and cautious management commentary. 25
0 20
In a weaker macro scenario discretionary -10 15
demand pick-up is unlikely to happen. Even the -20 10

Sep-18

Sep-20
Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Sep-19

Sep-21

Sep-22
Jan-13
May-13

Jan-14
May-14

Jan-15
May-15

Jan-16
May-16

Jan-17
May-17

Jan-18
May-18

Jan-19
May-19

Jan-20
May-20

Jan-21
May-21

Jan-22
May-22

Jan-23
May-23
improvement in CY24 is expected to be modest
on S&P 500 revenue growth at 5% versus 4% in
CY23, thus hopes of a sharp IT improvement EPS GROWTH PE RATIO
might be misplaced. Also, as earnings growth of
global clients is slowing, the pressure to cut cost 23 40
will remain high, which could be negative for 22
30
margins. 21
20 20
The current outlook remains uncertain, with 19
10
increasing headwinds clouding the horizon. 18
Valuations need to correct for this sector to 17 0
become attractive and growth outlook needs to 16 Margins have held up but are vulnerable to a -10
15 global slowdown.
improve for the long-term trend to re-exert its
14 -20
momentum.

Sep-16
Sep-13

Sep-14

Sep-15

Sep-17

Sep-18

Sep-19

Sep-20

Sep-21

Sep-22
May-21
Jan-13
May-13

May-14

May-15

May-16

May-17

May-18

May-19

May-20

May-22

May-23
Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Jan-20

Jan-21

Jan-22

Jan-23
EBITDA MARGIN EPS GROWTH *Nifty IT Index Constituents

Source: Bloomberg, DSP Data as on July 2023

Global Tech Is Back To 2021 Like Froth?
Large caps have seen euphoria and how! The With valuations shooting up to expensive category, they
CY2023 rally was contributed by Top 7 stocks… do not seem to be backed by equally strong earnings
23% 19%
30% 29%
18%
25%
20% 13%
15% 8%
10% 3%
Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

Jun-20

Jun-21

Jun-22

Jun-23

2007

2009
2000
2001
2002
2003
2004
2005
2006

2008

2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Top 7 stocks market cap as a % of S&P 500 Top 7 stocks Net Profit as a % of S&P 500

The run up in AI has reflected on skyrocketing of some 7 NASDAQ is also priced

Price to Sales Ratio

30 semiconductors’ companies, taking them above average valuations 6
considerably above average
25 5
4
EV/EBITDA

20
3
15
2
10 1
5 0
Jun-06 Jun-08 Jun-10 Jun-12 Jun-14 Jun-16 Jun-18 Jun-20 Jun-22 Jun-05 Jun-07 Jun-09 Jun-11 Jun-13 Jun-15 Jun-17 Jun-19 Jun-21 Jun-23
PHLX Semiconductor Index Average NASDAQ 100 Index Average
Source: Bloomberg, DSP Data as on July 2023
PV Sales 3-Yr CAGR Rises To Long Term Average After A Decade

50.0 PV sales, although seeing traction, are still patching as SUVs continue to dominate 35.0%
Amidst the looming disruption posed by EVs, a far
more influential and supportive reality is taking while other category growth rates are yet to see a return to base rates. 45.5
shape as consumers transition from small, 45.0 30.0%
economical cars to larger, high-ticket SUVs. 40.4
Presently, auto stocks are primarily influenced by 40.0 25.0%
near-term volume concerns or valuation/FCF (Free 36.5
Cash Flow) considerations, as demonstrated by 35.0 20.0%
Bajaj Autos and Hero over recent months and 32.2
31.4 31.2
weeks. However, as the initial bullish excitement 30.0 15.0%
subsides, new concerns will emerge, albeit with a
slightly different focus. 10.8%
25.0 10.0%
9.8%
The SUV market has exploded. It now commands
over 51% of the PV market. This means that near 20.0 5.0%
term disruption to this sector is going to come
from fragmentation of the SUV market. The 15.0 0.7% 0.9% 0.0%
headwinds from EVs and the sentiment overhang
could also be a contributor. -3.2%
10.0 -5.0%
The long-term prospect for this sector remain -8.3%
bright as growth rates are reverting to long term 5.0 -10.0%
trends. This sector is now likely to be a more
bottoms up bet than the ‘for all’ rally of the last 0.0 -15.0%
year and a half. Two-wheelers continue to remain FY87 FY89 FY91 FY93 FY95 FY97 FY99 FY01 FY03 FY05 FY07 FY09 FY11 FY13 FY15 FY17 FY19 FY21 FY23
attractive, but PVs need better valuations for now.
Passenger Vehicles Sales ( Nos in Lakh) (LHS) 3 Year CAGR % RHS

Source: CMIE, DSP Data as on July 2023

Gold Miners Still In Slumber, But For How Long? Breakout Ahead?
Gold Mining Equities Outperform, But Only In A Gold Bull Market Capital Allocation Discipline Has Helped Miners Be Net Debt Positive In This Cycle

Gold Miner Profitability Hit By High Energy Prices in 2022, Revival in 2023… Miners Are Placed Better On Valuations v/s The Broader Market
Gold Miners S&P 500
Gold miners ~two
EV/EBITDA 9.29x 12.45x
third as expensive

Dividend Yield 2.27% 1.68x ~35% higher

Net Debt/EBITDA 0.55 1.31 ~ fraction of debt

Total Debt/Total
14.61% 24.58% ~ less levered
Assets

Source: KITCO.com, Sprott Research

Who Do You Follow?

@safalniveshak
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