2 yrs back in June 2022 when Nifty was at 15000 odd levels everyone was talking about macros and today no one is talking about it. I thought of wearing the macro lens and try to understand economic cycles from Keynesian lens and see where India stands today.
There are 4 phase in an Economic Cycle: Depression, Recovery, Peak & Recession.
Depression Phase: When an economy is in a slump, industry struggles due to low demand and low capacity utilization levels. It is imperative of the government to spend on creating fixed assets(infra) to give a fillip to the economy. The central bank cuts interest rates to lowest possible level. Usually in phase GDP is multi-year low, credit growth is sluggish, stock markets are down and cheap.
Growth Phase: Slowly the economy starts to turnaround. Usually in this phase one by one sectors see demand revival due to govt capex & lower borrowing cost, credit growth starts to see revival, stock market rebounds sharply.
Peak Phase: Most industries are doing well and are operating near peak capacity. Announcements of new capex, brisk hiring, multi-year high credit growth, flurry of IPOs, new highs in stock market every month, mergers & acquisition across industries.
Recession Phase: Economy becomes overheated due to full capacity utilization and delay in commissioning fresh capacities. Inflations shoot through the roof. Government has to reduce/stop spending to stop the economy from becoming further overheated. Central Bank has to hike rates to curb demand so stop economy from further overheating. Operating Margins contract due to fall in demand as well as commissioning of new capacities.
Previous Cycle
After the Global Financial Crisis we had a recessionary scenario. In 2009 government stepped in to stimulate the economy with various measures, RBI kept interest rates very low. The economy recovered swiftly but govt kept spending and RBI kept interest rates too low for too long. Eventually the inflation flared up and RBI had to hike rate by almost 300 bps in 2011. Govt spending came down due to corruption scandals. Bank NPAs rose as govt projects froze and interest rates were multi-year high. Real Estate inventories rose and demand collapsed due to unaffordability.
Current Scenario
I guess 2019-20 was that depression phase where the economy was sluggish, government announced various measures like tax cut, PLI and massive infra spending to revive the economy. After covid RBI cut interest rates to one of the lowest in history. Economy recovery started from 2021 and we now are at in a full-fledged boom. There are 3 sectors which are important for capacity creation are Steel, Cement and Power. Right now all 3 sectors are nearing full capacity utilization levels. Steel can be imported and we had one of the largest imports of Steel in 2023. But power and cement can’t be imported. Usually peak in cement & power capacity utilization marks the top for an economic upcycle.
Predicting economic cycles and its impact on stocks markets has never been easy. But stock markets are trading at peak PE, peak OPM. If topline falters, margins contract and PE ratio also contracts the pain will be much more than what anyone is willing to believe today. There is time to ignore macro and there is time to pay attention to it. Stock markets are priced to perfection and looks like an accident waiting to happen. In such times you have to watch all risks with bated breath.
