Now that the first quarter of the calendar year 2024 has ended, it’s worthwhile trying to gauge the state of the global economic recovery from what the corporate earnings seem to be indicating so far. Of course, the March quarter happens to be the last quarter of our fiscal year in India, and we are still awaiting the GDP figures for Q4 as well as for the full FY24 to be released tomorrow.
Corporate earnings have been coming out thick and fast since the beginning of April 2024 and they don’t seem to be bad or under any kind of pressure for the most part. Starting with the US and the large multinational corporations at any rate, it appears that most of the earnings announced so far have been good. Good, not merely in terms of beating analysts’ estimates, but actually showing growth year over year. Looking at a report from FactSet that I saw online on the earnings of S&P 500 companies – who earn 59% of their revenues from the US market, with 41% coming from overseas – earnings growth has been at 5.4%, the highest reported since Q2 2022, when it was 5.8%. On the revenue front, growth in Q1 2024 has been lower than the 5-year and 10-year average coming in at 4.2%, but it is still the 14th consecutive quarter of revenue growth.
Of course, there are sectoral variations which tell us the strength of cyclical and structural changes taking place in the economy, as well as the strength of consumer spending and business investment. Of S&P 500 companies, 78% posted earnings above estimates, and 60% posted revenues above estimates. However, what matters is year on year growth and here too, eight of eleven sectors have reported earnings growth, led by communication services (digital and social media companies), utilities, information technology and consumer discretionary, while three sectors such as energy, healthcare and materials declined. In terms of revenue growth, it appears that eight sectors reported a healthy growth in revenues, with three sectors declining such as energy, materials and utilities.
I think a lot of it is being determined by commodity prices staying low, while inflation stays sticky in many others, especially in services. Besides, we still seem to be dealing with base effects. Financial services have shown good growth in net income as well as revenue on the back of higher interest rates as well as trading income. What is not clear is how much of the revenue growth has come from higher prices and how much from volume growth. Until last year, I remember reading and hearing in the news on CNBC that companies especially in consumer staples as well as discretionary sectors were enjoying reasonable pricing power, and it would be good to know if they have now had to give up some of it in order to improve volume sales.
From the fact that S&P 500 companies’ revenue growth is still lower than the 5-year average, it might be safe to assume that companies are trying to adjust their prices in order to keep consumer demand buoyant but that it isn’t really picking up all that quickly especially at the lower end of the market. In fact, the latest retail sales data for April 2024 in the US remained unchanged over March 2024 when estimates were for a 0.4% increase, indicating a slight cooling of consumer demand. Inflation ticked lower as well, which is encouraging news and one hopes it will maintain the downward trajectory. Pepsico reported that North America saw a decline in sales, while growth came from their international markets.
Across the board, profit growth is higher because companies are staying focused on managing costs and expenses better, including by reducing employee count. The latter is especially true of big tech and some banks in the US. Profit growth is also better due to frequent share buybacks, I would reckon.
In India corporate earnings are a mixed bag. Indian banks’ earnings, including the state-owned ones, are improving with a lowering of bad loans and growth in lending activity, though retail credit accounts for most of it, not corporate lending so much. On the other hand, even though big tech in the US and elsewhere are reporting a stellar set of earnings, India’s fabled tech giants have once again posted a muted set of numbers citing global weakness and clients cutting back tech spends. I find this hard to fathom because at a time of economic pressures and challenges as well as competition, companies usually accelerate their tech investments and reduce costs elsewhere. I wonder, therefore, if this is not a sign of the huge structural shifts taking place in the tech landscape with more AI related investments, that India is not being able to capitalise on quickly enough.
As far as CPG goods are concerned, corporate earnings were quite mixed once again. From what I read and heard in the news, bellwether FMCG giants such as HUL and ITC reported a muted set of earnings growth, with the former reporting volume growth of merely 2%. There was mention that there was intense competition from local and regional brands/companies. It appears that mid-size companies such as Marico and Dabur reported a better set of earnings this time. According to this Economic Times article, citing retail audit and research firm Nielsen IQ, consumer demand in rural India outpaced urban India, with rural demand growing at 7.6% and urban demand declining by 5.7%. Further, the FMCG sector grew in value by 6.6% with higher sales accounting for most of it, and price growth of only 0.1%. When I searched online for the March quarter FMCG sector growth in India from Nielsen IQ, Google would not serve me the right links – no prizes for guessing who’s meddling here.
Not having seen the Nielsen report or article myself, I find it hard to believe any of this analysis being reported by the newspapers – unprofessional PR agency idiot bosses’ friends in the media. None of this adds up to be true and factually consistent in my view: if rural India demand is growing, it ought to be mostly in the foods category as most of us professionals in the advertising and marketing industry know, but the ET reports that home and personal care are growing at 11% – driven by larger pack sizes – while foods are growing at a slower 4.8%.
On the other hand, The Economic Times also reported that according to Kantar WorldPanel, another retail audit and research firm (belonging to WPP group), the biggest spenders on FMCG in India were from the five southern states through 2023. Again, not being served the right links to see the report or article directly on Kantar WorldPanel’s website, I am unable to comment on the veracity of the findings. Besides, I don’t see how such reports are useful or helpful to the advertising and marketing industry, and I think that this set of data is also being cooked up to pander to unprofessional PR agency idiot bosses and their cronies in RK Swamy/BBDO Chennai.
Automobile sales in India are on a tear, and corporate earnings of major car manufacturers such as Maruti Suzuki, Tata Motors and Mahindra have been good, with SUVs and EVs leading the earnings growth, commodity prices staying cool and supply of semiconductors having normalised. Tata Motors also saw good growth in its JLR company. There are still challenges from the transition to clean energy in passenger cars and I think it’s unfortunate that India missed the hybrid technology phase – one that is gaining preference in the US at the moment, according to news reports – what with GST on hybrid cars at an prohibitive 43%, according to what I heard a senior Maruti Suzuki official say at a Times Now India Unstoppable Summit, aired a couple of months ago on ET Now business channel. This, while GST on EVs is at the lowest rate of 5%, and that on regular ICE technology cars is 28%, which is high enough to discourage people from buying cars, if you ask me! None of this kind of ad hoc policymaking makes sense, if we are to make the transition to clean energy and build India’s automobile industry in a country where passenger car penetration is still extremely low.
Looking at CMIE’s latest update on Q4 FY24 corporate earnings of all listed companies in India – both financial and non-financial companies – I am somewhat puzzled to see that revenue growth is still improving, while net profit growth is very low and declining especially in the case of non-financial companies, perhaps because of a base effect and expenses that seem to be growing, and yet net profit margin growth is still being maintained. The March quarter of last year is not available for comparison, but I think this largely reflects the base effects that I referred to, earlier. Of course, their analysis covers only a third of companies compared to previous quarters and perhaps we have to wait a while for the entire picture to emerge. That said, according to CMIE again, unemployment in India in April 2024 was 8.1%, with labour force participation rate as well as employment rates falling. For women, of course, these numbers are even lower, as I have been writing on my blog. So, even as we wait for FY 24 and the March quarter GDP numbers to come in tomorrow, and they are expected to be good, we mustn’t lose sight of the fact that India continues to suffer from jobless growth.
In UK and Europe, economic growth is much more anaemic, with the UK just emerging out of a recession and many countries in the EU in contraction. Inflation, although ticking lower is still at elevated levels particularly for consumer staples and services. They also remain prone to shocks from energy prices spiking, as both wars rage on, even though the economic slowdown globally has kept energy demand and prices lower. With consumer price inflation coming down to 2.4% for the Euro Area and 2.6% for EU, it is widely anticipated that the ECB will cut interest rates in June/July. On the corporate earnings front, most companies in Europe seem to have posted a good set of earnings, particularly the banks, which is welcome news considering European banks were still weak compared to their US counterparts.
Parts of East Asia continue to experience weak and slow growth as well, with the two major economies, China and Japan slowing. Japan, in fact, saw an annualized –2% contraction in its March quarter GDP, with capital expenditure and private consumption both contracting significantly. The much-weakened yen while helping Japanese exports, makes imports expensive and it appears that despite large wage hikes this year, consumers in Japan prefer to keep spending under check. China’s March quarter GDP surprised on the positive side at 5.3% and although retail sales and industrial production were below estimates, they were quite good, hinting that the world’s second largest economy might be on the recovery path.
As far as Chinese companies’ industrial profits are concerned, they grew by 4.3% in the March quarter though these have to be seen in proper context. Industrial profits for the first two months of 2024 grew by 10.2% and they fell 3.5% in March 2024. Also, the 4.3% profit growth comes over a 20.1% fall in profits in the March quarter of 2023, when the country was still reeling from the effects of the Covid-19 pandemic, which suggests there is still weakness and that base effects are still around. However, certain sectors in China such as high-tech manufacturing saw 29.1% rise in profits while automobiles saw a 30.2% rise in profits.
Few things stand out to me, when I look at the corporate sector and the state of growth in the global economy, going ahead. First, that consumer price inflation in services is proving to be stickier than that for goods and these are to a great extent down to domestic factors. Services inflation is also harder for central banks to control – other than housing – and so, countries might have to consider supply side and policy-related issues that help to keep inflation in check. Healthcare costs in the US, for example.
That said, when Biden, Trump and the EU all want to raise tariffs on Chinese EVs, semiconductors, etc. it could start another wave of a retaliatory trade war which is not good for anybody, least of all for consumers. As it is, the world is suffering from restrictive trade policies being pursued by major economies.
It is also apparent that the world is having to manage cyclical growth recovery especially from lower inflation boosting demand and investment, employment generation etc. as well as structural changes that are upon us which we cannot afford to ignore such as climate change and AI disruption. These structural changes that prepare us for the future is unfortunately where the competition between countries is fiercest and where geopolitics too is playing havoc. If we can at least manage services inflation through better domestic policies, and cooperate on boosting trade and investment in goods without shooting ourselves in the foot with restrictive trade policies, we might have a chance of staging a reasonably good economic recovery and growth.
Greater cooperation in areas that needs the world to find solutions together such as climate change, green energy transition, semiconductors and AI technology are imperatives, if we are to make progress. Competition is good, provided it is conducted in the right spirit and is for the benefit of all. Competition that chokes off growth is not what we need. Here, as always, global Inc might have the answers and be willing to go the extra mile; it is governments who have to find the courage, the leadership and the policies that can take the world forward.
The image at the start of this post has been generated on Microsoft Designer
Peripatetic Perch 