Looking for the vital signs (Indian Markets - July 2020)

Measuring what matters

I wrote a post looking at some of the macro indicators I like to follow to get a pulse on the economy in mid-June. It is currently the most read article in my newsletter.

At the time I did it for the US, today, I decided to look at India.

Why do this?

Human beings have vital signs like pulse rate, respiration rate, body temperature, weight, etc. to make sure everything is functioning correctly. If something is wrong, a combination of those signs or indicators will start deviating from average raising red flags.

Similarly, economies also have few indicators that serve as vital signs, and monitoring them could give you a sense of the health of an economy.

TL;DR version:

😐GDP Growth: Slowly expanding
😐Unemployment Rate: Higher than average but less than the previous month
😐Indian PMI: Lower than average but more than the previous month
😓👎🏻PE Ratio: Higher than average
😐Market/GDP: Fair value
😁👍🏻Yield Curve: Positive

Keep reading if you want the details.

Let's begin from the top-

GDP:

Gross Domestic Product (GDP) measures the annualized change in the inflation-adjusted value of all goods and services produced by the economy. It is the broadest measure of economic activity and the primary indicator of the economy's health.

The Indian economy expanded by an annualized 3.1 percent in the first quarter of 2020.

Slowest GDP growth since data became available in 2004.

Unemployment Rate:

The Unemployment Rate measures the percentage of the total workforce that is unemployed and actively seeking employment during the previous month.

The average unemployment rate in India currently stands at 11%; it was 23.5% in April and May. The last 5-year average was around 7%-8%.

World PMI:

Purchasing Managers' Index (PMI) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies.

Composite Pmi in World averaged 52.29 points from 2013 until 2020, reaching an all-time high of 55.50 points in July of 2014 and a record low of 26.50 points in April of 2020.

It currently stands at 36.30 points.

Indian PMI:

Composite PMI in India was in the range of 50-55 points from 2013 until 2020, reaching an all-time high of 55.30 and a record low of 27.40 points in April of 2020.

It currently(May) stands at 47 points.

Nifty PE Ratio:

The full form of PE ratio is a price to earnings ratio, and it is broadly used to identify how cheap or expensive a particular index is. Simply put P/E ratio implies the amount an investor is willing to pay to earn one rupee as profit.

Average: 21.53 (2006-2020)
Max: 29.7 (May 2019)
Current: 27.8

Higher than average but nothing crazy. Signally fairly valued.

Market/GDP:

The total market valuation is measured by the ratio of total market cap (TMC) to GDP -- the equation representing Warren Buffett's "best single measure."

The current ratio of total market cap over GDP for India is 53.14%. The historical high was 158.2%; the historical low was 39.97%.

It is currently at 53%; for developing markets, more than 70% is considered overvalued. By that measure, Indian markets are probably fairly valued.

30Y-10Y-3M (Yield Curve):

The 30-year yield for the Indian treasury is currently at 6.5%.

The 10-year yield for the Indian treasury is currently at 5.85%.

The 3-month yield for the Indian treasury is currently at 3.17%.

The yield curve is calculated as 30Y-10Y-3M. Since 30Y > 10Y > 3M, the yield curve is positive, and that is good for the economy. The negative yield curve is generally a strong leading indicator of a recession.

To Summarise (July 5th, 2020):

😐GDP Growth: Slowly expanding
😐Unemployment Rate: Higher than average but less than the previous month
😐Indian PMI: Lower than average but more than the previous month
😓👎🏻PE Ratio: Higher than average
😐Market/GDP: Fair value
😁👍🏻Yield Curve: Positive

As things started to open in June in India, even though there is no evidence it should open, we see signs of an improving economy. It by no means is back to want it was in early 2020, but we're chugging along.