Bernstein says it doesn’t matter if the latest rebound in the macro is in the form of U-shape or V-shape
Will the current weak macros trigger a multi-year bull cycle for the Indian equity markets?
While the current set-up offers similarities to FY03 — the inflexion point for the previous multi-year bull cycle between FY04 and FY10 in India — it may just end up being a macro rebound, says Alliance Bernstein, a global investment management and research firm.
The US-headquartered assets management firm compared various macro data points at present with that in the past bull cycles to conclude that this would be “a macro rebound but not a multi-year bull cycle”.
“From the death of the previous strong macro upcycle in India from FY04-FY10, equity investors are patiently waiting for the next one, but the cycle has stayed elusive. With macros back to historic lows — seen in the FY01-FY03 phase — the debate on the potential for the next large cycle has commenced. Similarities of the current situation with that in FY03 are being cited as a reason for this discussion,” the note says.
It further says, “While we expect macros to revive on a low base in FY22, we are still not a believer of a multi-year strong macrocycle, which had emerged from FY04. The sins of the past decade will take more time to unwind, in our view”.
So what are the similarities with the previous bull-cycle?
“Start with the fact that everything is weak now. Macro was weak for several years, banking NPA was high, real estate was in a downturn. The rural economy, which was weak due to monsoons trending down from 1999-2002, improved from 2003. Interest rates and inflation had moderated, and several important reforms were announced,” Bernstein highlights as similarities.
And why does the investment firm believe the Indian economy may not do a 2003 encore? “One of the largest challenges is that execution on reforms is weak, diluting the impact of several decisions. With lower returns, limited access to resources, the private sector is not keen to participate in infra and the easier infra catch-up build is already behind. Smart cities, mass transport systems are new scripts, but the execution is weak and volatile. Inability to scale-up manufacturing and focus of Indian companies on traditional products makes it difficult for exports to scale-up meaningfully,” it says.
Bernstein says it doesn’t matter if the latest rebound in the macro is in the form of U-shape or V-shape. For a multi-year bull cycle, it says, the GDP growth has to bounce back to 8 per cent levels and sustain there for several years.
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