By Roop Bhootra
The year 2022 has been quite unique with a mix of various factors like volatility, greed, fear and geopolitical concerns for the overall financial markets including equities, debt, commodities and crypto. The year started off with the hike in interest rates globally implying a major shift in central bank’s loose monetary policy regime so far. The rate hike was not only were rising but also was one of the steepest hike in past 30 years and surpassed previous hike cycle peak for the first time. This led to volatilities in other asset markets like equities. The inflation on the other hand looked stubborn due to non-linear shocks globally during the year which further put doubts on global growth and profitability of the corporates in general.
Having said that, the Indian economy and markets have weathered the global volatility and uncertainty relatively well. Though in Jul-Sep’22, India’s GDP growth decelerated and fallen below long-term average. Yet, to 6.3% it remains resilient. Except for the fall in government consumption, other components of GDP like imports, fixed investment and private consumption posted growth. However, with the base effect fading out the growth momentum in consumption also loosing pace especially in durables and rural markets. Alongside the high frequency data on investments ex-bank credit growth also suggests considerable stress in investment activities. Rapid rise in policy interest rates, rupee depreciation, financial conditions in India are getting tighter leading to lower risk appetite impacting investment activities in India during FY23.
Coming to the inflation, the momentum is softening in India but levels are still considerably elevated. The extent of softening gathered momentum in Nov’22. Yet, the YTD inflation rates levels remain elevated versus long-term averages. On YTD basis, fuel inflation most elevated and food the least. From the long-term perspective, even core inflation is not extremely elevated. High base and relatively modest monthly increases are taking the inflation rates down rather than fall in prices.
With relatively better inflation scenario, policy rate hike in India seems to be close while it is likely to continue in OECD countries. This could be one of the reasons for continued rupee depreciation. Coming to the overall market structure, this year we have seen that divergence between performance of stocks in Nifty50 & Nifty Midcap100 and Nifty50 & Nifty smallcap100 has systematically increased. Meaning more number of Nifty50 stocks were trading above their 200dma in comparison to their smaller counterparts like midcap and smallcap stocks. This was last seen 2019 and before that around 2012-2013. Also, from earnings perspective Nifty50 consensus earnings have seen downgrades in past three months for FY23 and now staring at a de-growth over FY22 earnings if Q3-FY23 results doesn’t surprise on positive side. So looking at consolidated view from valuation point of view, P/E valuation for Nifty50 is exposed to de-rating risks in short term.
Coming to the sectoral performances, on YTD basis, Banks, specially PSU banks, Metals and FMCG were outperformers while IT and Pharma underperformed and public sector enterprises and defence related stocks outperformed on theme basis. I think this trend could continue to hold for more time as global growth visibility is still cloudy over rates and growth concerns. To summarise, investors should maintain a cautious view on the markets and accumulate some cash to deploy in near term if any opportunity arises. India’s GDP growth slowed in Q2-FY23 but remains resilient, both private consumption and fixed investment remained buoyant.
(Roop Bhootra, CEO, Investment Services, Anand Rathi Shares & Stock Brokers. Views are author’s own.)