The month of March was a volatile month for the markets with the initial part in the Indian Markets being dominated by the Adani issue and then the global banking crisis. Regulators and Governments were proactive addressing the issues and by the end of the month now no one is talking about those things. Indian Markets overall have continued to underperform overall for the quarter despite a sharp recovery at the end of March. Overall for the quarter we saw many markets rally 10-12% while Indian Markets were down 5% a significant underperformance.
As I had written during the middle of the month update I am not negative on the markets. Indian Economy and its banking system is today one of the best placed in the world. Subsequent to the correction and underperformance of the first quarter of 2023 the valuations are also much better relative to rest of the world and back to long term averages.
Global Monetary policy now seems to be reaching at the fag end of the tightening cycle. Central Banks after misjudging the overall inflationary dynamics have been very aggressive in tightening liquidity and rates which have started impacting growth as well as inflation. Due to the lag impact the effects will be sharper going forward. Sharp upmove in rates started to create the issues as we saw with Silicon Valley Bank and as such the future direction will take into account both Financial Stability as well as inflationary dynamics.
The Emerging Market outlook looks better with overall EM allocations now sharply down and cash positions with global investors near panic highs. The US Dollar Index also seems to be looking to correct more during the year and that is normally bullish for Emerging Market equities. China’s growth and governments actions on large corporates seems to be stabilizing thus improving sentiments. My long term view is that China will find it very difficult to grow rapidly due to overinvestment as well as a sharply declining population which is also becoming older before the country has become actually rich. However with supply chains from China stabilizing we will see less price pressures as bottlenecks go away. Commodity prices should remain subdued as overall global growth will remain subdued which is always positive for India.
We are on the verge of the results season now which starts in April. This time since markets have been down and expectations are low the markets are not at risk from results. Companies that are able to outperform expectations will do much better in terms of stock price movements. At this stage domestic economy linked stocks look much better placed than globally linked sectors. Indian Banks have been unnecessarily beaten down due to the global banking issues. Indian Banks are one of the best placed globally. Revived capex cycle will help many infrastructure, capital goods, defence etc companies to help do well over the next 2-3 years.
It will be key to see what the Monetary Policy Committee does next week. Most dynamics of inflation have improved since the last MPC meeting. Further rate hikes will only slow growth while having little impact on inflation. Wholesale inflation is already down to multiyear lows. If interest rates peak then we should see growth revival play out in India.
Overall I am bullish going into the second quarter. Indian Market Capitalisation to GDP has come down to 80% levels much lower than 2021 levels of 112% and also makes overall valuations reasonable. The Nifty PE has also come down to around 16-17X one year forward earnings down from nearly 22X of last year as markets have consolidated and also corrected. Monsoons and its impact will be keenly watched. Earlier there were predictions of a very warm Summer. As I write temperatures in most parts of the country are below historical temperatures. So predicting the weather makes no sense. There are significant opportunities to buy into companies at good valuations which are likely to do well over the next 1-2 years.