Market Update – October 2022

We are going through a cycle of heightened global news flow, events and uncertainty. Financial conditions have tightened following aggressive monetary policy action across the world to combat surge in inflation. This has caused higher volatility in financial markets and USD has strengthened to a two-decade high. Central banks and governments are grappling with the rapidly changing economic outlook and this was reflected in United Kingdom where currency plunged upon government move to cut taxes and within days they were forced to rethink on their strategy. At the same time, we believe that Central banks all over the world, will have to loosen their tough and aggressive rate hike plans to ease this upheaval in financial markets.

The Indian economy and to some extent, financial markets have come out relatively unscathed so far. The INR has been amongst the best performing currencies vs the USD. Domestic demand remains stable with accelerated credit growth at 16.2% YoY. Seasonally adjusted manufacturing capacity utilization reached the highest level in three years, standing at 74.3% in Q2FY23. Outlook for Rabi season also augurs well with reservoir levels at 87% of full capacity vs a 10-year average of 77%. The central bank data trends suggest stronger domestic demand from robust credit growth, capacity utilization, winter harvest prospects and capital goods demand. However, downward risks to exports are possible, due to headwinds from geopolitical tensions, tightening global financial conditions and slowing external demand restrict GDP outlook.

From a global investor perspective, Indian equities are coming back in focus, given the resilient economy and currency. A view of moving away from EM funds and China funds into India specific funds is also slowly gaining pace. This flow should act as an added strength for Indian equities. However, we have to be conscious of the global events and news flow and avoid chasing momentum. In the near term, as we enter the earnings season, we expect stock specific volatility as many companies/sectors will witness margin compression owing to high input prices. At the same time, if festive demand is good then markets may like to ignore near-term noise and just focus on the positives. We would prefer to be in the latter camp.

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