The World As We See It
Global Macro Scenario
The global economic outlook remains clouded by headwinds. Uncertainty persists, from China's property woes to Europe's inflation roller coaster, leaving no shortage of turbulence ahead.
Developing economies felt the pinch more acutely, with imports and exports dropping 5% and 7% respectively, compared to a milder decline of 4% in imports and 3% in exports in developed nations. While there are predictions of a rebound in FY25, significant uncertainties remain on the horizon.
The US Federal Reserve's hawkish stance, maintaining the federal funds rate at 5.25% – 5.5%, subdued sentiment, contributing to a US trade deficit of US$ 91.84 billion in February 2024. The US economy shows mixed signals. Unemployment held at or below 4% for 27 consecutive months, with 303,000 jobs added at the end of 4QFY24. The Consumer Price Index rose 0.4% in March 2024, with a 3.5% year-on-year increase, the biggest gain since 2QFY24. This dissonance is reflected in the US Consumer Confidence Index in March 2024 at 104.7, essentially unchanged from a downwardly revised 104.8 in February 2024.
On hopes of a soft US landing and AI enthusiasm, global stocks had their best Q1 in 5 years, with the MSCI ACWI up 7.4% in 4QFY24. Japan's Topix soared 18.1% in 4QFY24, leading the pack. Although some European indices hit record highs, MSCI Europe ex-UK lagged slightly behind the US and Japan, returning 9.7%.
The Eurozone grappled with challenges this quarter, including a 1.2% decline in productivity last quarter, reflecting post-financial crisis struggles. While Italy outperformed with GDP growth exceeding the average, Germany faltered. Disinflationary pressures persist, with inflation falling to 2.4% in March 2024, down from 2.6% in February 2024. Despite rising real wages, 14% higher minimum wages compared to end-2019, the ECB maintained high interest rates at 4.5% main financing, 4% deposit, due to economic uncertainties. Manufacturing PMIs weakened in March 2024 to 46.10 points from 46.50 points in February of 2024, diverging from services.
Mid-FY24 saw a surge in global oil inventories, up by 47.1 million barrels. Offshore stocks rose due to record seaborne exports and Red Sea shipping disruptions. Beginning of 4QFY24 saw a 48.1 mb global stock plunge, with OECD industry stocks at a 16-month low. Benchmark crude prices held steady at the end of this quarter, factoring in OPEC+ production cut extensions to 1QFY25.
Asian economies face a precarious recovery path, heavily reliant on external factors. Currencies surged last quarter amid global rate cut expectations, but uncertainty remains, tied to China's economy. India, Indonesia, and the Philippines performed better in currency markets due to higher policy rates.
This quarter, the Bank of Japan raised rates for the first time in 17 years, abandoning its negative interest rate policy. With the benchmark rate at 0.1%, which could have ripple effects on global bond yields in coming quarters. China's economic data reflects a tale of two cities: industrial output thrived (growing 7.0%), led by tech, chemicals, and car manufacturing, while retail sales sputtered at 5.5% in the first two months of 4QFY24. China saw a continued decline of 9% in property investment compared with a 24% fall end of 3QFY24.
Overall, the global economy is a complex beast, and 2024 promises to be a year of challenges and, hopefully, triumphs. By staying informed and adapting to the ever-shifting landscape, we can navigate these economic uncertainties and emerge stronger on the other side.
India Macro Scenario
The Indian economy presents a fascinating picture of contrasting trends, boasting a robust GDP growth rate of 7.6% in FY24, exceeding expectations, and easing inflation to a comfortable 5.1% in February 2024 and 4.9% in March 2024, a four-month low. The strong performance is further bolstered by a record high US$ 642.63 billion in foreign exchange reserves, reflecting the RBI's successful interventions to maintain currency stability.
Source: Ministry of Commerce & Industry
However, a more nuanced story lies beneath this optimistic picture. India’s consumption narrative remains unclear. Private final consumption expenditure (PFCE) is projected to grow at a lower-than-anticipated 3% in FY24, and recent reports from the Retailers Association of India indicate an uneven growth pattern. While FMCG thrives, consumer durables and electronics lag. This could be due to earlier weakness in rural demand, but recent signs suggest a turnaround, potentially aided by the RBI's stable interest rates, which could allow for further economic traction in FY25. Government policies like increased rural spending and extended food subsidies aim to boost consumption, but the RBI's cautious stance on rate hikes due to inflation might delay significant benefits until the latter half of FY25. Meanwhile, the stock market paints a rosy picture. In FY24 the Sensex emerged as one of the best-performing markets globally, rising by a significant 24.9%.
Foreign portfolio investment (FPIs) started 4QFY24 as net sellers, with January recording US$ 417 million but turned buyers in February at US$ 182 million. March saw a dramatic shift with inflow of US$ 4.24 billion, though not without volatility. The first half of the quarter attracted US$ 4.91 billion, but tax-related selling caused outflow of US$ 673 million in the second half.
On the inflation front, India's retail inflation dipped below 5% for the first time since mid-3QFY24 to 4.85% in March 2024 (lowest since May 2023), reaching a welcome trend. This positive shift follows a year of elevated inflation, averaging 8% throughout FY24 (8.5% in 4QFY24). However, core inflation remains under control, staying below 4% for the past 4 months.
The rupee's resilience bolsters India's economic story, remaining stable against the dollar unlike many asian peers, aided by RBI interventions. While it came under pressure for the quarter, it persistently stayed above 83/$
The services sector is another bright spot. The HSBC India Services PMI soared to 61.2 in March 2024, signifying one of the strongest growth rates in over 13 years. This surge is attributed to healthy demand, improved efficiency, and a record rise in new export orders. Similarly, the manufacturing PMI reached a 16-year high of 59.1 in March 2024, driven by strong production and new orders, with companies actively expanding their workforce.
India's economic narrative is far from complete. While strong expansion takes centre stage, pockets of weakness require attention. However, the positive trends in manufacturing and services, coupled with the anticipated improvement in rural demand, offer a promising encore for India's economic future.
Early Stage Ecosystem
The Indian early-stage startup ecosystem continues to be a hotbed of innovation and a magnet for investor capital. While global economic uncertainties posed potential headwinds, 4QFY24 witnessed a robust close to the fiscal year, showcasing the ecosystem's underlying resilience and long-term potential.
4QFY24 capped off the fiscal year on a high note for early-stage investment activity. It witnessed the highest investment total of US$ 1.83 billion compared to other quarters in FY24, although this represents a modest 2% increase from US$ 1.79 billion in 3QFY24. Despite a 48% decline in funding rounds compared to 3QFY24, the 264 deals recorded in 4QFY24 still indicate healthy investor confidence. This is further evidenced by the significant 96% increase in average deal size, jumping from US$ 3.5 million in 3QFY24 to US$ 6.9 million in 4QFY24. This shift suggests a focus on larger deals while maintaining an appetite for promising early-stage ventures.
Beyond the headline figures, a noteworthy trend is the growing investor focus beyond major metropolitan centers like Delhi, Mumbai, and Bangalore. This geographic diversification unlocks exciting possibilities for startups addressing the unique needs and untapped potential of Tier-II and Tier-III cities. This shift presents a compelling investment thesis for ventures catering to a broader and often underserved market segment.
Investor confidence continues in established sectors like E-commerce startups (including D2C brand), fintech, healthtech, SaaS, EV, AI, and edtech. Furthermore, emerging areas like Climate and Agri Tech are garnering growing interest, reflecting a focus on sustainability coupled with innovation. 4QFY24 also saw two startups – Krutrim SI Designs and Perfios joined the club.
Looking towards FY25, a year of steady growth and a healthy deal flow is anticipated. The strategic shift suggests a maturing market driven by sophisticated investor behaviour. This presents an attractive landscape for investors seeking high-growth opportunities in innovative and impactful startups across the length and breadth of India. This trend bodes well for the continued growth and maturation of the Indian early-stage ecosystem.
India's startup ecosystem is on a transformative journey, where a confluence of factors is fundamentally changing how domestic and international investors perceive India as a key investment destination. A growing domestic economy, a maturing regulatory environment, and a young, tech-savvy population are fueling a wave of innovation. This, in turn, is attracting increasing investment, further validating India's potential as a global startup hub. At Equanimity, we remain enthusiastic about the potential of early-stage ventures within our portfolio. These companies address critical market needs and showcase cutting-edge solutions, contributing to the dynamism of the Indian entrepreneurial landscape.