Market Update – January 2023

NIFTY50, after hitting all-time highs during the early part of December, reacted as investors chose to book some year-end profits. NIFTY50 ended the month negative 3.5% while broader markets performed marginally better with S&P BSE Midcap and S&P BSE 250 SmallCap down 2.5% & 2.1% respectively. Globally, all markets ended weak as rising Covid infection and its impact on the global economy along with demand impact owing to high inflation worried investors. China’s reopening of the borders after three years was a positive trigger for the Hong Kong markets to rebound sharply.

A recap of dramatic 2022:
The year started on a negative note as Russian invasion of Ukraine constrained supply chains of multiple commodities resulting in a sharp surge in their prices, which added to inflationary pressures. This unexpected spike in inflation forced central banks across the world to be aggressive in their interest rate hikes and this led to a risk-off in markets globally. The resurgence of Covid cases in China and other parts of the world towards the end of year brought back worries of an economic slowdown. CY22 would go down in history as one of the few years where global investors had negative returns in both equity and debt markets in addition to heightened volatility in the currency markets.

Market Outlook:
Post a strong two-year rally from covid lows, markets have taken a breather in CY22, posting a modest ~4% returns. However, if we look around, India is amongst the top performing markets globally. The year started with record high FII outflows. However, FII’s turned net buyers again since August, a function of a relatively resilient Indian economy that grew at 6.3% in a year where the world was staring at recession. Domestic flows into the equity markets remained very buoyant in 2022 and the trend is expected to continue.

India continues to be amongst fastest growing large economies globally and has come out as very resilient amidst the global turmoil. Going ahead too we are in a sweet spot as the growth rates are expected to accelerate. Unlike our past dependence on only consumption, economy today has more pillars of growth. The 4Ds are supporting the India Story – Democracy (Pragmatic government policies, government spending), Demographics (Rising working age population, rich product propositions), Domestic consumption (Outlook on both rural and urban is strong) and Digitisation (amongst the best in the world).

We believe that quite a few headwinds in 2022 will ebb and in fact become tailwinds. These would include inflation coming off sharply, possible end of interest rate cycle, global economies coming back to stability and growth, China opening-up aiding global growth and hopefully some solution on the Russia-Ukraine issue. Indian equity markets have seen 2022 as a year of consolidation. Our view is that 2023 will be an interesting year with possibility of double digit returns though accompanied with volatility. The importance of investing in companies with profits, visible growth in profits and in a value conscious manner was the highlight of investing in 2022. We expect this to be only reinforced in the coming year.

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