The beginning of 2023 for the Indian Markets has been contrasting to what the rest of the world has done. While this was the same case last year it did not concern many as we were outperforming and as such the “Decoupling” story was working well. From the start of 2023 the tables have turned in a way where Indian Indian Markets have been dull for several weeks thus frustrating investors and traders. Markets have gone no where and are down YTD while most other markets are up 5-15% already. So what lies in store
At the start of the year my view was that globally equities should do well this year as we enter the fag end of the global tightening cycle and the fact that most markets had already corrected significantly in the year 2022. The sell off in most markets ex of India was very severe with even large cap US Stocks, especially the technology majors correcting 50% or more.
The Union Budget was fine and it was progressive with continuation and not many changes. The focus on the capital expenditure continued and the effects of which are visible in terms of developments in Highways and Railways as well as Urban Infrastructure. However the positive impact of that got tempered with the issues surrounding the Adani group where the meltdown in the group has been very significant with the value erosion from the top being more than 50%. In this context the Indian Markets have held up reasonably well. While retail ownership of Adani stocks was there the holding on the institutional side, especially among Mutual Funds is very low and as such reduces the hit for investors in general. The thing we need to wish for is that there is no spillover of the crisis of the group on the banking system where banks have spent years cleaning up their balance sheets and are now in a very healthy position with record low NPA’s and strong capital adequacy as well as profit growth.
The other factor that is visible from company results is that the impact of inflation on consumption is now clearly been seen. While consumer demand remained strong when prices were moving up sharply in 2021 and 2022 by the end of 2022 it started impacting demand. However with inflation abating now and due to high rural incomes as a result of strong crop prices across the board we should see rural revival as well as urban demand stabilization going forward. The investment cycle continues to be strong with most capital goods and infrastructure companies reporting strong growth and order books. One intriguing part of consumer demand is that at the luxury end and for cars, SUV’s etc the demand has not slowed down as people seek to upscale.
It is very interesting these days that in conversations the biggest talking points are inflation and interest rates. I wrote extensively last year that markets were underestimating inflation as well as the potential increase in interest rates and the impact of reduction on liquidity. However as we approach the end of the tightening cycle and a potential inflation reversal getting concerned on that is not what I would be. On the contrary it will create potential for better equity market returns going forward. Most people were not concerned when the US Fed increased rates from 0 to 4.5% and now they are concerned whether the peak will be after another 0.25% or 0.5%. It is quite strange.
Growth prospects in India continue to be reasonably strong with a strong investment cycle, government spending likely to remain strong in the run up to the 2024 elections and a potential revival in consumption demand. Valuations have adjusted well with the markets going nowhere now for the last 18 months. While the GDP continues to grow the returns from the stock markets are never linear. There are always periods of strong returns, no returns and negative returns. The important thing is to look at things over a period of time. Indian GDP will continue to grow at 6-7% with inflation of 4-5% i.e. a nominal value GDP growth of 10-12%. With some productivity improvements equity market returns should average 12-14% over the long run. Low return periods increase the return potential of the next 3-5 years and high return periods much above these returns reduce the return potential of the following periods.
A big part of the current underperformance of the Indian Markets is driven by the strong performance of 2022 which took India’s valuations much above other markets valuations and then the sell off driven by the issues related to the Adani group. A large part of this adjustment seems to be over. Even as a contrarian indicator I see most people being concerned about inflation and interest rates rather than looking at upsides. So what is the risk? The risk could come from sticky inflation that refuses to come down. However that is not my base case at this stage.
Remember Equity Markets are a patience game. Patience in Buying, patience in holding, patience after selling and waiting to buy something else and avoiding FOMO so as to not buy stocks at unsustainable valuations.
Market liquidity as reduced and there is little interest in small and mid caps at this stage. That is usually a good time to accumulate these stocks. Broader Market recovery usually follows a stabilization and upmove in the frontline indices. So this is time to be patient with your portfolios if you believe you hold the right stocks. It is also an opportunity to restructure your portfolios towards winners of the future as many themes which worked due to Covid or due to the disruptions of Covid might not work going forward. In my view with all ups and downs overall 2023 will be good for the Equity Markets.