STOCK MARKET UPDATE & OUTLOOK Dec 2022 The Run Continues



Indian Stock Markets continued to defy gravity and moved to all time highs during the month of November. As the markets did not correct when global markets corrected during the first few months of the year as globally things stabilized Indian Markets have continued to move higher. Volatility also came down sharply as markets moved higher and conviction grew on inflation and interest rates peaking out. Nifty was up 4.1% this month while the Midcaps underperformed with a 2% growth.

We are now into December which is typically a muted month without much up’s and downs. So what should be the outlook for 2023 when valuations are already high and higher interest rates are impacting growth. In my view 2023 overall for index returns will be a tough one with a -10% to +10% zone being the most probable scenario. There are many moving pieces for us to bet on one side. For example which way will inflation go globally, how severe will the slowdown in China and rest of the world be, the long term impact of liquidity withdrawal by the US Fed and ECB on global asset valuations etc.

The positives for India lie in a good capital expenditure cycle which has come after a decade, a strong financial system with NPA’s at near historic lows and an improving credit cycle, greater focus of the government on growth as the Central Government enters into the last year of the 5 year cycle, higher rural incomes driven by a potentially good winter crop and higher corp prices which should be good for rural incomes as well as falling inflation due to the correction in commodity prices and improved food supplies.

The headwinds will come from global factors like higher interest rates, less liquidity, slowing growth which could impact sectors like technology and commodity companies as well as continued geopolitical tensions creating volatility.  

India to that extent is better placed as our inflation issues are relatively lesser as compared to the Western Economies. We were used to double digit inflation till just about 15 years back and inflation was slowly tamed in India. As such a 7-8% inflation is not felt so much here as an 8% inflation is felt in developed economies.

Overall valuations of Indian Markets are now nearly 25% higher than historical valuations which indicated muted returns overall from the broader indices over the next one year. However sector and stock specific opportunities will remain as sectoral rotation create opportunities. For example the fancied sector of the last two years i.e. Chemicals could see severe margin compression over the next two years as capacities increase and demand slows down. Similarly many commodity consumers like Automobile and Durable companies as well as plastics etc consumers will see strong margin uptick over the next 1-2 years driven by lower input prices which could more than compensate for higher interest rates which is usually negative for these sectors. A static investment strategy is unlikely to work in these kind of conditions and we have to be ready to shuffle portfolios as opportunities come. Companies catering to the Defense and Railways could see sustained growth for the next 2-3 years. Consumer companies have suffered due to slower growth and compressing margins. That could reverse going forward.

Market valuations have a direct linkage to the risk free rate i.e. rate on government bonds. These rates have gone up substantially this year as such any market upmove cannot get support from rerating on the upside. In this situation only earnings growth can drive the markets which also is moderating giving slowing economies. As such the next one year will be tough for investing. However India is still growing at 6% on a higher GDP base. This will always give opportunities to invest in companies that do well in specific sectors.

Many people ask me questions on New Generation listed companies, Fintech’s etc. We need to be careful of companies whose entire business model was built around taking valuations higher by delivering high growth without any focus on profits in the hope of getting sold or raising money at higher and higher valuations. As such opportunities in these companies will be small and far between. My advise is not to look at historic prices to take investment decisions for the future. There will be some winners for sure.

Many global markets after the severe selloff have recovered 10-20% from the bottoms and are now not as far away from all time highs as we would want in the current growth cycle. There is no need to feel left out. Markets always give opportunities and they will do so in the future also.

The thinking process has to be contrarian to perform in the kind of markets we are entering where interest rates are higher, growth slower and as such valuations could come under pressure. Companies that are at very high valuations based on unrealistic expectations of growth might see sub normal returns for the next 2-3 years.

Overall the only way to do well over the next 1-2 year will be to look at opportunities as markets correct and be contrarian.