The Consensus Bullish Forecast
Isn’t it puzzling that although economic and financial forecasts have a terrible record, the media publishes dozens of forecasts at the beginning of the year on economic growth and how stock indices would fare at the end of the year.
Forecasting is a more formal and well-recorded business in the US, and so it provides great examples of forecasting follies. The consensus view in the US for 2023 was that the S&P 500 would fall; instead, it climbed 24.2%, and the NASDAQ 100 soared over 50%.
The Chinese stock market was expected to rebound on post-COVID-19 'reopening' but it sank.
The widely trumpeted prediction of the US recession was wrong; its gross domestic product (GDP) rose strongly. The Federal Reserve's interest rate hikes were expected to slow down consumer spending and business growth; instead, the economy continued to grow, inflation fell and stock prices rose.
On the other hand, breakthroughs in artificial intelligence (AI) research started an unexpected bull market in US technology stocks.
Markets and economies are complex, emerging, adaptive systems. They are not static; hence, predictions about how they will behave invariably turn out to be wrong or useless as new events set in motion a complex interplay of factors leading to unexpected outcomes. However, what if the drivers of economic growth remain in place for a longer time? Would the forecasts then be more accurate?;
For instance, after a surprising lack of initiative on the economic front between 2014-2021 (except the knee-jerk tax cut of 2019), the Narendra Modi government has suddenly ignited several growth engines simultaneously and unleashed economic forces of change that India has seldom seen. This, perhaps, makes it easier to predict long-term outcomes—as long as the stated policies remain in place and their execution matches up.
Production-linked Incentives: Launched in a small way in March 2020, the production-linked incentive (PLI) scheme aims to turn India into a manufacturing hub and reduce its reliance on imports, especially from China. The scheme offers incentives if incremental sales of locally manufactured products reach pre-set targets. It has had limited success so far because import of finished goods was replaced by import of components with minimal assembly being done here.
However, every new sector begins manufacturing activity with the assembly (as TV manufacturing was in the 1980s) of products and such operations also have a ripple effect. The PLI scheme appears to be over-ambitious: we are nowhere near the six million jobs that were to be created and Rs2 lakh crore given out as incentives between FY20-21 and FY26-27.
But I believe that Indian enterprises are more ambitious, hungry and resourceful than they were ever before and the scheme will boost manufacturing, to some extent.
Massive Capital Spending: Ever since Independence, economists have forever complained that the Budgetary allocation is mostly wasted on funding revenue expenditure, primarily government salaries and interest on borrowings. No money is left for much-needed capital expenditure (capex). This suddenly changed in the 2023-24 Budget when the government announced a stupendous capex of Rs10 lakh crore for defence, urban infrastructure and railways (allocation of Rs2.40 lakh crore, a whopping 75% jump over that in FY22-23).
The government has committed to a capital outlay of Rs8.3 lakh crore for the defence sector over the next few years. The Defence Production and Export Promotion Policy 2020 set a domestic production value of Rs1,75,000 crore with exports of Rs35,000 crore by 2025. Energy is another sector enjoying massive capital outlay on renewables to smart grids to smart metering.
Cut in Imports: This is not obvious now but if the capex on PLI, energy and defence pays off, three of the biggest import items—electronics, arms and oil—would be cut sharply, leading to a structural change. Sectors under which the PLI scheme have been announced constitute around 40% of total imports.
The benefits of this massive  multi-directional government capex is visible. Every few days, companies are announcing orders that are multiple times their revenues. Analysts are finding it hard to keep up with the torrent of such news and updating their revenue and profit forecast.
The consensus is that, at least for the coming few years, we have a stable and committed policy framework and, hence, forecasts of sustained growth is a given. This has led to a consensus about the markets heading higher.
Who Doesn’t Know It?
Extrapolating economic fundamentals to stock market forecasting is a big leap, though. Stocks rise significantly when they are undervalued and there are positive surprises. Right now, stocks are no longer undervalued and everyone in the market already knows about the huge positive impact of railways and defence expenditure. This is why wagon manufacturer Titagarh Rail Systems leapt 367% and Mazagon Dock shot up 191% last year.
As Howard Marks, legendary US investor advised, when you are excited about something (such as a country’s or a company’s future), ask yourself: who doesn’t know that? If everyone knows that, it is not a surprise and the rosy future is already reflected in the current price.
Indeed, when everyone is bullish and agrees with one another, one needs to be cautious. A slight negative news can cause a serious setback.
(This article first appeared in Business Standard newspaper)
Pragna Mankodi
5 months ago
Great article pointing out the follies of forecasting the movement of stock market. However, if we look back at the history, at least I am convinced that this bull phase is not like 1992. It\'s backed with good fundamentals based on companies\' results and their own long term strategies. It is the confidence of the business and investing promoters\' confidence in the current dispensation and it\'s policies that has given fillip to investors\' interest in the stock market. As compared to 1992, the investors - particularly the young generation of today - are better informed and smart. Yes, valuations are certainly high but it reflects the confidence of the investing public in those companies about their earning capacity and ROI and ROE. After all, game of investment is - in addition to art and science - all about how one views the financial risks and balance them to ensure the fulfillment of investment objectives.
Replied to Pragna Mankodi comment 5 months ago
The question is , as an investor, do you have an "Edge" ?
Pragna Mankodi
Replied to shankarmes comment 5 months ago
My reply is definitive yes. The transparency, with the use of IT infra, has increased significantly. Under direction from RBI banks have opened investor\'s education centres and SEBI has also tightened policies and processes to insulate the investors from frauds etc. As a result, I feel more informed, secured in deploying my funds into the stock market.
Kamal Garg
Replied to Pragna Mankodi comment 5 months ago
There is definitely more transparency, more dissemination of information or rather deluge of information all across leading more aware and better educated people around us. a better informed person is likely to take a better decision also.
As per baby-step policy, there will be 'assembly' first of the imported components leading to manufacture also later provided there is a right environment and policy stability. India is already one of the biggest markets of the world and therefore scalability should not be an issue.
Replied to Kamal Garg comment 5 months ago
We should not forget bear markets begin even when companies are reporting a 100% profit rise and bear Markets end even though the companies are in a down cycle. I am not trying to predict that the cycle will turn, but sometimes remembering this keeps me grounded.
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