Despite strong global headwinds roiling financial markets worldwide, India’s equity market stood strong this year as a stellar performance of bluechips saw the 30-share Sensex soaring 4.94% so far, The 50-share Nifty has risen 4.82%.
But 2023 is likely to be choppy and the returns might be moderate as a raft of factors, including geopolitical uncertainties, recession fears and interest rate trajectory, will weigh on investor sentiments. The Nifty index has retreated six times in the past year after breaching the psychological 18,000 mark, with three corrections in excess of 10%.
“Going into the year-end, global markets have broadly stabilised. India continues to be among the fastest growing economy and stands out in the global investing landscape, decoupling amidst heightened global volatility,” said Sunil Singhania, founder, Abakkus Asset Manager. “Baring near-term volatility owing to global events, we feel medium to long-term outlook is quite positive for India. Over the coming six months, inflation globally will ease and this bodes well for equity markets too.”
The Fed has raised interest rates by 425 basis points in 2022, which includes four straight hikes of 75 bps each. The rise in the dollar put pressure on all major currencies, with the rupee seeing heightened volatility and a depreciation of over 10% against the greenback.
Also read: Markets Tomorrow: Nifty, Sensex rebound from lows; markets may remain flat as rate hikes, Covid dampen mood
FPIs are net sellers for eight out of the 12 months, pulling out over $16.5 billion till this year. This is the highest FPI selloff since 2002, the year from which data is available. This surpasses the selloff of $12.5 billion seen in 2008.
Domestic flows, though, have remained steady amid the turmoil. Domestic institutional investors (DIIs) bought shares worth Rs 2.67 trillion in the year to date, two-thirds of which have been purchases by mutual funds. The total inflow by way of SIPs has been robust, averaging over Rs 12,000 crore per month.
The share of DIIs, along with retail and high net-worth individuals, in companies listed on the NSE reached a fresh all-time high of 24.03% as on September 30. Share of FPIs declined to a 10-year low of 19.03%. The number of demat accounts crossed the 100 million mark in August but new account openings have since tapered off.
“The structural robustness of the Indian market appear indubitable to us. Our tactical caution on India arises from the market’s sky-high relative valuations, the possibility of fund reallocations to North Asia with China’s reopening, likely consensus earnings-estimate downgrades in the domestic consumption-oriented sectors and the likelihood of volatility around the upcoming Budget,” said Manishi Raychaudhuri, Head of Asia-Pacific Equity Research at BNP Paribas Securities.
The Nifty is trading at 19.5x its 12-month forward price to earnings multiples.
“Our markets have not corrected as much as some of the developed markets. Valuations, when compared to our historical past, do not look out of sync, but appear rich relative to the rest of the world,” said Anoop Bhaskar, head – equities, IDFC AMC. “The reality is that if the projected earnings growth of 20% for FY24 does not materialise, we will be in trouble at some point of time. Also, if the Fed does not do a pivot, India may not see a multiples re-rating even with decent earnings growth.”
Outlook
BofA Securities expects Nifty to end CY23 at 19,500, implying muted but positive returns. It envisages two scenarios: Nifty could trade at 17,000 levels if inflation remains sticky and Fed pivot drags, with sharp cuts to Nifty FY24/25 earnings growth at 7/9% (versus Street estimates at 19/13%) or Nifty at 20,000 in the event of a soft landing.
Also read: Markets Wrap – Thu, 29 Dec ‘22: Stocks rise, rupee appreciates; Asia, Europe markets, Gold, Crude, Crypto updates
Raychaudhuri estimates a 7% derating for India as valuations catch up with a more sober earnings growth expectation. Crude oil (Brent) prices are forecast to stay in the range of $90-100/bbl.
Recession fears currently outweigh supply concerns, though the risk to the price forecast could be skewed to the upside due to higher Russian supply risks and a potential resurgence in Chinese demand, according to BNP Paribas.
“Global growth is slowing down so the pressure on commodities will ease, normalising cost structures for Indian companies, especially sectors such as cement and steel. India will benefit from the changing geopolitical equation and can increase its share of exports,” said Bhaskar.
UR Bhat, co-founder at Alphaniti Fintech, believes that interest rate hikes in the US are expected to continue during the first and possibly, even the second quarter of 2023. “Most of this has been factored into prices, and if there are no further negative surprises, the Indian markets will be able to attract foreign flows. However, any stalemate in the Russia-Ukraine conflict and a spillover of the Covid situation in China may impact markets globally, including India,” Bhat said.
He feels that the corporate earnings growth numbers have not exactly been great and India will need to see mid- to high-teens earnings growth to justify current valuations.
Bhat sees two positives, however. The thrust on capacity creation by the government has helped in the absence of private sector participation. International manufacturers are diversifying their supply chains because of the serious energy crisis in Europe and the problems with too much reliance on China, which stands to benefit India.