Category: Market Outlook

I happened to be in the United States for the second time post covid this month. My last visit was in September/October 2022 and was for a short period of 5 days, on the East Coast. This visit in early May was a good 11 days, one of my longest work visits in years. The itinerary of Mumbai – New York – Omaha – San Francisco – Mumbai meant that it was a full circle of the earth, something like “Around the world in 11 days.” It was interesting and I am sharing a few observations and anecdotes of this visit with you. Hope you find them useful.

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It was again a very challenging month of March, with news flows pertaining to global banking stress and stability taking precedence over everything else. The first half of the month saw a total risk-off globally as investors grew increasingly worried over issues related to Silicon Valley Bank and other regional US Banks and Swiss Credit Suisse survival. However, a combination of US Fed support and takeover of Credit Suisse by UBS allayed fears, leading to a smart recovery in equity markets. Surprisingly, most developed countries’ equity markets ended the month with gains. All major US indices ended with gains, with Nasdaq rising the most. Indian markets also saw a better last week in March, with NIFTY50 managing a small gain of 0.3% for the month. Broader markets were generally weak with BSE Midcap and Small Cap 250 indices being down 0.4% and 1.3% respectively. After a long time, both FIIs and DIIs turned net buyers – FIIs to the tune of USD ~1 bn and DIIs to the tune of USD 3.7 bn.

Market Outlook
For Indian equity investors, the year FY22-23 was also very challenging with the war, interest rate hikes, high inflation, global banking collapses and sporadic cases of covid still lingering, playing their role. Equity returns were almost non-existent with heightened volatility. There have also been sharp sectoral churns with focus shifting to profitability in businesses in the high interest rate environment. There was also mean revision in most input prices and many companies had to give away their covid period gains. This volatility has come as an opportunity for value conscious style of investors like us as we get to accumulate and gradually build positions using this volatility.

In the challenging global outlook, India stands out for the global investor. The potent combination of Democracy, Demographics, Domestic economy, and Digital Infrastructure; is being appreciated and that should mean that Indian economy will be the fastest growing large economy for the next few years. India is embracing digital payments and transactions with open hands, and this is bringing in rural inclusion along with productivity gains. Manufacturing has picked up owing to government focus on “Make in India” and the attractive Productivity Linked Incentive scheme (PLI) is leading to capex for capacity additions. China + 1 has meant that it is not just IT+ Pharma, but new sectors like chemicals, textiles, garmenting, consumer goods, etc that have seen pick up in exports. With a pragmatic and focused government in place we can expect this momentum to continue.

There have been no returns delivered by Indian equities over the last 18 months. This, along with the almost 25% growth in earnings during that period, has led to the valuations of Indian markets come almost to 10-year trend. NIFTY50 now trades at ~18x FY24 and ~16x FY25 earnings, providing opportunities to generate decent returns. The sharp fall in broader markets have also opened-up avenues to generate alpha over the market returns through investing in the less obvious names. We will continue to focus on profit making companies, where there is visible decent profit growth, and where what we pay today will be more than made up by way of future profitability.

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Global markets started the month of February 2023 with continuation of optimism from the previous month. However, risk off set in as the markets started to re-price the peak Fed rate higher after the recent inflation surprise. Most equity markets ended in the negative for the month, with Hong Kong and Nasdaq being the weakest. In India, NIFTY50 too was down by 2.0% accompanied by broader markets, with both BSE Midcap and Small Cap 250 indices being down 2.0% and 2.9% respectively. Despite a very good- and forward-looking finance budget presented by the Finance Minister, concerns over the collateral damage caused by sharp fall in Adani group stocks led to cautiousness and nervousness among investors. FIIs continued to be sellers of Indian equities to the tune of ~USD 682 mn while DIIs continues the trend of absorbing the FII outflows by pumping in another USD 2.3 bn.
        
Quarter results update :
Q3FY23 was a tepid quarter with NIFTY50 earnings rise 12% YoY led by the BFSI sector. Investment-led sectors such as capital goods and cement posted a healthy topline while consumption-driven sectors such as FMCG and durables found their pricing abilities put to the test. BFSI had a good quarter with margin expansion and improved asset quality. Exports were steady in both services and manufacturing sectors led by tier-I IT and electronics manufacturing services (EMS) players, though the pharma sector saw continued generics price erosion in the US.
        
Market Outlook
The month of February witnessed many headwinds and led to general risk-off for global equity markets. Indian markets also witnessed nervousness with broader markets seeing sharp corrections. However, on multiple parameters there is now reason to be optimistic. 

The sharp fall in Adani group stocks led to concerns of collateral damage on banks and generally on the perception of Indian economy. However, there seems to be little reason to doubt on the serviceability of debt by the group as most borrowings are backed by profit generating assets. The secondary market fund raising of USD 2 bn by promoters has eased the nervousness to a large extent with group stocks recovering sharply. 

Recent economic data points from US and other major economies are showing that global growth remains steady so far. While in China economic activity (PMIs, home sales, travel) has rebounded sharply post the reopening of the economy, in the US, labour market strength is supporting domestic demand. Globally, lower commodity prices are translating into lower input costs which in turn is helping in cooling inflation down. However, the pace of moderation is weaker in US than earlier anticipated. Core inflation also remains sticky in both US and Europe. This is likely to put pressure on central banks to keep rates elevated for long. However, we believe that inflation will cool off sharply by mid-2023 and ease the upward pressure on interest rates. 

Rural economy and domestic agri industry is positioned to benefit from a bumper rabi crop (output up by 6% YoY) coupled with stable crop prices (wheat up 20% YoY) leading to strong cash flows for farmers. There is fear of poor monsoon emanating from potential El-Nino conditions. However, reservoir level remains above the ten-year average (all India level) and with farmers entering kharif season with solid cash flows, impact on overall rural / Tier 2 demand should not be material.

Last couple of quarters quite a few sectors faced headwinds, due to sharp volatility in input prices as also the impact of higher energy and freight costs. However, all these cost headwinds: input, energy, and freight; have subsided meaningfully and we expect margins to start improving from March 2023 quarter and fully normalizing in the June 2023 quarter. This should lead to earnings growth trajectory for Indian corporates trending back to 15%+ annually. 

There have been no returns delivered by Indian equities over the last 18 months. This, along with the almost 25% growth in earnings during that period, has led to the valuations of Indian markets come almost to 10-year trend. NIFTY50 now trades at ~18x FY24 and ~16x FY25 earnings, providing opportunities to generate decent returns. The sharp fall in broader markets have also opened-up avenues to generate alpha over the market returns through investing in the less obvious names. 

We are now very constructive and believe that the next two years can be good period for investors in Indian equities.

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