Slowdown in global growth: Implications for investment

slow growth

There are clear indications of global economic growth slowing down this year. The latest World Economic Outlook from International Monetary Fund (IMF) has revised global growth down to 2.8 percent. Growth in developed countries has been revised down sharply. This will impact emerging economies like India, too.

The IMF’s growth projections indicate significant variations in growth across regions. See the table:

There are some significant takeaways from the IMF’s growth projections:

  1. Global growth will be significantly down this year compared to 2022 and will recover only slowly in 2024.
  2. The worst slowdown in growth will be in the Euro Zone with growth collapsing from 3.5 percent to 0.8 percent.
  3. Growth in Emerging/ Developing economies will be higher in 2023 at 5.3 percent compared to 4.5 percent in 2022.
  4. China, thanks to reopening, will be the only economy experiencing higher growth in 2023 than in 2022.
  5. India’s projected growth will be marginally lower in 2023 compared to 2022 with slow improvement in 2024. More importantly, India will be the fastest growing large economy in the world during the four-year period 2021-24.

What will be the impact of global growth slowdown on India?

Which sectors will be impacted?

Which sectors will be resilient to the slowdown?

How should the investment strategy be tweaked?

These are the relevant questions.

First, let us accept the fact that the global growth slowdown will affect India, too. India’s growth too will be impacted via lower exports. Corporate earnings also will be lower than expected now. 42 percent of Nifty earnings have global linkages through IT, pharma, and commodities. To what extent India’s growth and earnings will be impacted will depend on the intensity of the global slowdown, particularly the US slowdown, which is uncertain now.

IT will be on the backfoot

FY23 Q4 results of IT majors clearly indicate slowdown in the industry. IT industry is likely to clock only 5 to 8 percent revenue growth in FY24. If the US recession is worse-than-expected, the slowdown for the industry will be harsher. Stocks of IT majors have already corrected in anticipation of the slowdown. IT may rebound from the low levels but is unlikely to lead the market. Mid-cap IT companies in niche areas can buck this trend.

Pharma has the potential to stage a comeback

The pharma sector has been languishing for the last two years. Valuations are now reasonable and since pharma demand is price-inelastic, global growth slowdown will not adversely impact the industry.

Focus on domestic economy-facing segments

Since the domestic economy appears resilient, the domestic economy-facing segments will do well and has the potential to attract investment. Prospects of the following sectors look bright.

  • Banking: Credit growth in the economy continues to be robust. The banking system is in the pink of health.
  • Autos: There is growth rebound in autos. Investors must be selective in picking stocks in auto segment. Auto ancillaries also are on strong wicket.
  • Capital goods: Capex revival in the economy augurs well for the capital goods segment.
  • Construction: Prospects for construction-related segments look bright. We are at the peak of the rate hiking cycle. RBI is likely to pause after, perhaps, one more rate hike. Stability in lending rates will be good for the sector.
  • FMCG: There are signs of revival in rural demand. If this trend sustains, the prospects of the FMCG sector will improve. FMCG stocks are always high-priced; therefore, investment should be in reasonably priced growth segments. See Geojit’s stock recommendations.

Apart from the sectors and segments discussed above, there are stocks across sectors that look good for investment. Some of the new generation digital stocks are attractively priced now after the sharp correction from their peaks.

There will be more clarity on US inflation and interest rates by Q3 CY23. Investment strategy and stock selection can be revisited when more insights into US interest rates and global growth are available.

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