The month of March was progressing at a boring clip till the Silicon Valley Bank crisis hit us and we have seen deep sell of in markets as a result. While the US Government and other agencies have insured the depositors and also made statements that depositors will not lose any money in any bank the stock markets worldwide are still jittery. In this context we need to evaluate the scenario in totality to determine what lies ahead.
First and foremost this is no “Lehman Moment”. We have got used to TV Commentators and new generation experts making every crisis into a Lehman Moment without knowing anything about it and how that crisis encompassed the entire financial system and its linkages world wide. This is maybe a crisis 1% of its size. By this time enough has been written about this so I will not write too much in detail except for the fact that its more a specific bank crisis. Not that some other small banks might not suffer collateral damage but the overall financial system is safe and most of these banks have little global linkage to the overall financial system. Also most importantly when Deposits are backstopped by the US Government then effectively the depositors know that their money is safe. If the money is safe then there will be no run on the deposits of more banks and if there is no run then there will be no crisis. It’s all a vicious or virtuous cycle. If people believe they can lose money they will run to remove deposits, that will lead to selloff of assets at lower than market prices, which leads to more liquidity crisis and so on. However once deposits are secured and the US Fed has also given a special drawing right for upto one year to banks to meet liquidity needs this crisis has largely been nipped in the buds in my view. There will be some near term jitters which will die out very soon. Also its not a bailout as shareholders lose all their money if a bank falls and that is how it should be. Near term volatility can remain as investors reassess risk.
There is no real impact on the Indian Economy due to all of this. Some startups might face near term issues and technology outsourcing budgets might get deferred, however nothing beyond that. The key is that financial markets are linked to each other and as such the short term volatility will remain. This has come right after the Adani Group issue which has created more downside for the markets with the Indian Markets now one of the worst performing in the world for this year. On one side it has hurt investor interest in the near term. On the other hand it has made the Indian Markets cheaper than they were last year and future return potential has improved.
Indian today is one of the best placed economies worldwide in terms of macro parameters. Our various parameters in terms of inflation, growth, government finances, balance of payment issues etc are well under control. Overall growth prospects are also decent despite the near term compression in consumer demand driven by high inflation. Over the last one year the 10 year bond yield is up from around 6.9% to 7.4%, a 0.5% move despite significant RBI Monetary tightening. As such although working capital financing has become more expensive the long term funding costs are still well in control for most corporates. Consumer loan rates have moved up but still not into very restrictive territory. Government spending and investment in capacity build up continues at a strong clip.
The joker in the pack remains the monsoon and its impact on the overall economy. While we are not weather experts the current outlook is that there will be ElNino starting July and also Positive IOD starting the same month. Historic analysis of such years suggest that Elnino plus position Indian Ocean Dipole creates a situation where monsoons are actually in surplus. Last such year was in 2019. Forecasts are being used by many to sell off rural related and consumer stocks and such stocks are providing good entry opportunities for investors. 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. Peaking of interest rates will also create upward rerating opportunities in some sectors. I still remain wary of Technology, Chemicals and some high priced consumer stocks while some others have become reasonably priced. Financials, Auto, Capital Goods etc look well placed.
Last year was a strange one with Indian Markets decoupling from global markets to a great extent. However its not possible that such things continue and coupling is back. Markets will always be volatile and returns from stock markets are not secular in a straight line. That’s the reason why risky assets give more returns to long term investors than bank deposits. Overall I am bullish on the markets for 2023. Any downmove creates better upside opportunities for investors who can invest periodically or at current times.