Equity Market Review

Mr. Shridatta Bhandwaldar
Head - Equities

Equity Market Update

• In the month of Sep'22, equity markets were on a negative side with Nifty 50 declining by 3.74% m-o-m basis majorly led by global macroeconomic uncertainty, rising interest rates across the globe and selling from foreign Institutional Investors in the domestic equity market.
  
• Foreign Institutional Investors (FIIs) were net sellers in Indian equities to the tune of Rs.7623.63 crore this month.
  
• Goods and Services Tax (GST) collection shows that Rs. 1.47 lakh crore collected for Sep'22, which is 26% more than the corresponding period of last year. GST collection has crossed ₹1.25 lakh crore mark for the twelfth consecutive time.
  
• During the month, markets witnessed some correction as fears of a looming recession dampened market sentiments. Some degree of profit booking too contributed to the overall weakness in the bourses. Equity markets were under pressure because of concerns that aggressive monetary policy tightening by major central banks worldwide might cause interest rates to stay high for an extended period of time. A surging dollar index also acted as a headwind for the markets. The Asian Development Bank lowered its prediction for India's GDP growth for the FY23 to 7% from 7.2%.
  
• Government data showed that the combined index of eight core industries grew 3.3% in Aug 2022, slower than 4.5% rise in Jul 2022 and 12.2% in the year ago period.
  
• However, during the month, some value buying was seen as correction in global crude oil prices from the recent peaks provided some respite to market participants. Improved corporate tax collections during FY'22 and vigorous GST collection data raised expectations over economic recovery.
  
• Globally, equity markets remained on a negative zone in Sep'22 as U.S. Federal Reserve Chief and other officials indicated that the U.S. central bank will continue to tighten its monetary policy at an aggressive pace to combat rising inflation in U.S. European markets fell on growing prospect of recessions in the euro zone and the U.K. Asian markets remained a bit under pressure over similar concerns over global recession and rising global inflation levels.

Equity Market Outlook

Global environment is turning further adverse with sticky inflation at higher levels in an environment when growth is slowing down. This is outcome of increase in interest rates, tightening of liquidity and elevated energy prices along with challenged supply chain in China. Geopolitical tensions are taking time to abate and are only getting complex with Russia's latest move to annex few regions / Ukraine regaining lost ground on war front. Given these tensions; supply chains and global trade has become vulnerable to new dimension missing till 2022. In our worldview, 1) the Liquidity, 2) Growth and 3) Inflation surfaced post monetary and fiscal expansion in 2020 in that order and they will reverse in the same order. We are already witnessing liquidity reversal since last few quarters; growth has started receding lately (Europe is already in recession, US is slowing) and inflation will be the last one to moderate. Inflation is taking more time than usual to recede given elevated energy prices, tight labor markets and challenged supply chains in China. In-turn, further interest rate increases become imperative - expect additional 100-150bps increase through the year to 4-4.5% in US – much higher than expected early on.
This environment would have implications for emerging markets including India in the form of 1) Hostile flows, 2) higher cost of capital and 2) impact on exporting sector growth. We believe that the inflation and energy equation will adjust itself over next 6-12 months (unless we get a full-fledged European/Asian conflict, which is low probability event in our view). This is expected to happen despite Russia being large supplier of Gas and oil, as money supply reduces and growth moderates. Expect sizable growth moderation in developed world over next 4 quarters, as impact of lower liquidity, zero fiscal support, higher energy prices and higher cost of capital plays through in underlying economy.
On domestic front, India has outperformed most EMs on earnings and index return front over last 4 quarters sizably. Indian market has recovered post sharp pull back of ~15% in July/August and valuation are no more inexpensive, given modest earnings moderation lately. India is more sensitive to energy prices as compared to most of its peers. With oil still at US$90, the CAD can deteriorate by >1.5% for FY23 to 3-3.5%, depending upon the period of elevated energy prices, putting pressure on inflation and currency. RBI has used reserves as first line of defense for currency, and thus interest rates increase might now be higher towards 6-6.5% as compared to earlier expectation of increase till 6% repo rate. Expect inflation to range above 6% through next 2-3 quarters before moderating. Clearly, we are vulnerable – if this sustains for longer period. If energy prices correct the way they have been during last few weeks, we might see faster moderation of inflation and lower need to increase interest rates.
Having said that there are no macro worries, given >US$530bn of forex and > US$30-50bn of FDI annually. We are working with a base case that the energy prices will adjust itself within next 2-3 quarters and thus the impact on economy and earnings would be far less than what market is projecting. India story remains constructive, if the energy prices moderate in a shorter time frame than anticipated.
While in near term there are challenges; equity outlook from medium term perspective remains constructive for India. We see several factors which are constructive viz. 1) Corporate earnings are expected to be healthy over 2-3 years with nominal GDP growth at 10-11% CAGR, 2) Government has shifted focus to growth despite fiscal constraints – visible in Govt/PSU capex numbers – benefited by higher than expected tax revenues for FY23 , 3) Exports while will moderate, are still likely to be resilient in pockets, 4) Bank and Corporate balance sheets have gone through de-leveraging over last 6-7 years and are ready for growth as environment stabilizes and 5) discretionary consumer demand remains healthy– visible in Auto, Retail, Real estate, Travel etc. All these factors indicate a conducive growth environment as compared to past few years on domestic front through next 3 years.
At aggregate level, the nifty earnings growth estimates for FY23/24 have remained unchanged with 12-14% CAGR, respectively. After a span of five years, we have witnessed earnings upgrades through 2HFY21/22. The earnings upgrade cycle has taken a pause in 1HFY23 due raw material price pressures – after 6 consecutive quarters of earnings upgrade of ~25%. The earnings upgrades cycle has moved to domestic cyclicals from exporting sectors. The earnings upgrade cycle has firmly shifted from externally focused sectors like IT, Commodities/other exporters towards domestically focused sectors like Financials, Discretionary, auto, Industrials, Housing etc. Assuming the energy prices moderate to <US$80 within next 3-6 months, this cycle could convert into a full-fledged business and credit cycle for next 3 years. Given this context, the portfolios have also gradually been aligned to sectors where the earnings upgrades are likely to happen over the next 2 years, the domestic cyclicals.
Nifty is trading at 19xFY24 on consensus earnings, in a fair valuation zone from medium term perspective, assuming earnings downgrades are not substantial in FY23/24. The current uncertainty is good medium term valuation entry point for Indian market in our view, given that most domestic enablers are in place, and we are underway a cyclical upturn in domestic economy and earnings.
Key risk still appears to be on 1) Earnings downgrades, if energy prices remain elevated for longer period than anticipated, 2) stagflation, 3) Escalation of war and 4) Negative impact on domestic growth and due to longer and higher global inflation.
Source: ICRA MFI Explorer