As the year 2022 ends, here is an interesting statistic. Global stock indices are down almost all over the world. At the time of writing this, this year, the MSCI All-country stock market index is down 17%. The US S&P 500 Index is down 16% while the Nasdaq is down 28%. Indices in Europe (Stoxx Euro 600) and China (Shanghai Composite) are also down 10% and 15% respectively.
India, however, is up. India’s BSE Sensex and Nifty is up 5.8% and 5.5% for the year respectively,
It’s not been a good year for stocks. The year started with markets around the world at record highs. We soon had a Russia-Ukraine war, which threatened to put the world into chaos. Even though the worst-case didn’t happen (yet), the war did lead to higher commodity prices. The war continues, with no sign of an end soon, causing uncertainty. Stock markets don’t like uncertainty.
Stock markets don’t like high interest rates either, which happened this year as central banks raised rates around the world to combat high inflation. All those Covid subsidies and cutting down of economic activity during Covid lockdowns came with a big bill – called inflation. Soaring inflation led to massive interest rate hikes. Stock prices are valued based on discounted future earnings. Higher interest rates mean a higher discounting rate, or lower stock price. Hence, markets declined all over.
But India didn’t fall. Was it just a technical anomaly, where our declines are also imminent, for there is no reason for us to do better than world? Or did India do something right with its economy?
The magnitude of India’s outperformance suggests it wasn’t an anomaly. We did something right.
Some will argue that the stock market isn’t a perfect gauge of the real economy. It sure isn’t. However, it is also highly unlikely that stock markets hit all-time highs in a terrible economy. India indeed did a few things right. Here are six of them:
- Managing inflation – India’s retail inflation in the first half of 2022 was at 7.2%, vs the global average of 8%. This is despite the high oil and commodity prices due to the Russia-Ukraine war. While inflation is high and pinches everyone, given what is happening in the world, India did much better.
- Not cancelling Russia – When the war broke out, the “right” and “woke” thing to do was to cancel Russia. We didn’t. Sure, one can have views on the war. Indian government has communicated ‘This is not an era of war’ to the Russian leadership. However, we didn’t cancel Russia. We are not a woke Instagram account. We are a huge country. We need oil to run it.
- Investments in infrastructure – The emphasis on infrastructure is leading to better roads, ports, airports and trains. This is enhancing productivity across the nation. Also, data networks are better than they were 5 years ago, and the power of Internet connectivity is finally coming through in how Indians do business. This is leading to better revenues and earnings for corporates, which in turn leads to GDP growth and of course, higher stock markets.
- Relatively benign lockdowns – India had its share of shutdowns, but they were relatively benign after the first few weeks or months. Some may have called the approach too casual, but we kept the economy running more than many others. Our neighbor China is still locking down cities. India seems to have forgotten Covid. When did you wear a face mask last?
- Relatively large domestic economy – Over the last few decades, the Indian consumer has increased his or her buying power. Also, domestic companies across all products and services have mushroomed. A large part of our consumption, production and investment is domestic, which shields us from global headwinds. We are not decoupled from the world or world markets. However, our domestic economy acts as a cushion, softening the blow of global negative trends.
- Relatively limited Covid subsidies – while it was tempting and perhaps considered noble to give out subsidies during Covid, India kept them limited. Other countries printed stashes of cash and handed them out to citizens. Massive inflation was bound to happen. Nothing in life comes free, especially subsidies.
We are quick to criticize the government when the economy doesn’t perform as well or when we underperform the world. Hence it is only fair to praise it when we perform better, which in 2022, we did. Indian indices are one of the few sources of green in an otherwise red list of global stock market performance.
Going forward, India should remain a good place to invest as we build out our infrastructure and take more manufacturing away from Covid-restricted China. As 2023 comes around, global inflation should come into control and maybe even the war will find a resolution. That will lead to positive global headwinds, which will help Indian stocks further as well. Some say the next decade will be India’s decade, and it may well be. For now, at least we can say, as far as stock markets are concerned, 2022 was India’s year! Well done!