Equity Market Review

Mr. Shridatta Bhandwaldar
Head - Equities

Equity Market Update

• In the month of Jan'23, equity markets went south with Nifty 50 dropping by 2.45% m-o-m basis majorly led by weak global cues and huge sell off in some of the index heavyweights. Market participants worried about higher borrowing by the Indian government in the next fiscal. Strong selling by foreign institutional investors also added negative sentiments in the markets.


• Foreign Institutional Investors (FIIs) were net sellers in Indian equities to the tune of ₹ 28851.97 crores


• Goods and Services Tax (GST) collection shows that ₹ 1.55 lakh crore were collected for Jan’23, which is 24% more than the corresponding period of last year. This is the second highest collection next to the collection reported in April 2022


• Sentiments were further dampened after the United Nation downgraded its GDP growth forecast for India for the CY’23 and warned that higher interest rates and global economic slowdown may adversely impact domestic exports and investments


• Though during the month, markets went up as rupee strengthened against the greenback, falling yields on U.S. Treasuries and the weakening of the dollar index also acted as tailwinds for the markets. Upbeat domestic earning numbers for the quarter ended Dec’22 and drop in inflation improved overall market sentiments. Government Data showed that the India's Eight Core Industries growth increased by 7.4 per cent in Dec’22 as against a growth of 3.8 percent recorded in the year-ago period.


• Globally, US equity markets went up during the month U.S. Federal Reserve monetary policy review showed that the U.S. central bank might slow down the pace of rate hikes moving ahead. Initial jobless claims in U.S. came down for the week ended Jan 21 and U.S. durable goods orders, personal income, new home sales and pending home sales grew in Dec’22. Asian Equity Markets rose on optimism over a demand boost from China's reopening. On the other hand, European Markets rose, coupled with hopes of the new British Prime Minister leading Britain out of an economic crisis further boosting market sentiments, improvement in German business sentiment and a surge in eurozone manufacturing activity in Jan’23.

Equity Market Outlook

Pragmatic budget with focus on Growth and Macroeconomic Stability

Budget FY24 was a budget which managed to focus on productive growth on infrastructure, helped modestly the mass middle-class to save some on taxation and still managed the fiscal deficit projections at 5.9%. Best part is all of this was done without any unrealistic projections on revenue (tax and non-tax) side. Despite election related compulsions, the Government maintained fiscal deficit moderation path to 4.5% by FY26 – key parameter which will ensure macroeconomic stability when Debt to GDP is running higher that 80%. Gross and net borrowings are along or lower than market expectations.

The capex budget is expected to rise by a whopping 37% y-o-y to a record INR 10 tn. Including the transfers to states for capex under centrally sponsored schemes, the rise is 30%, to a record INR 13.7 tn. And including PSE capex to this, the rise is 28%, to INR 18.6 tn. The core direct core capex has grown to INR 10 tn, from INR 7.5 tn. Within this the primary focus has been on Roads (at INR 2.7 tn, 25% y-o-y), Railways (INR 2.9 tn,15% y-o-y) and Defense (INR 1.6 tn,7% y-o-y). Other key contributors to infra capex was Pradhan Mantri Awas Yojana at INR 0.8 tn and Jal Jeevan scheme at INR 0.7 tn. To help consumption boost budget proposed few proposals on personal income tax side, which will add INR 0.4 tn to the savings pool of the middle class.

Budget has managed to create investment acceleration without damaging other expenditures. This was a modestly positive for equity markets. Consistent key positive for economy has been that Govt has been trying to focus on productive spending within constraints of resources over last 8 years.

From equities perspective it was a good budget. It has focus on both investments and consumption. It is modestly positive for Industrials, Banks and both FMCG and non-FMCG discretionary consumption. Equity market will move back to two key factors from tomorrow, the earnings (season) and cost of capital (interest rate outlook globally). We think that both these factors are neutral to negative for us from near term perspective and thus market will continue to consolidate till we get visibility on earnings upgrades or substantial decline in interest rates (Inflation globally/locally) to change multiples. India trades at premium to other Ems and thankfully that is correcting with the consolidation over last 1 year. Indian equity market trades at 19xFY24 earnings – with earnings CAGR of 13-14% over FY23-25E – in a fair valuation zone from near term perspective.

Having said this on near term earnings /market context, we believe that Indian economy is in a structural upcycle which will come to fore as global macroeconomic challenges recede over next few quarters. Our belief on domestic economic up-cycle stems from the fact that the enabling factor are in place viz. 1) Corporate and bank balance sheets are in best possible shape to drive capex and credit respectively, 2) Consumer spending remains resilient through cycle given our demographics, 3) Govt is focused on growth through direct investments in budget as well as through reforms like GST(increasing tax to GDP), lower corporate tax and ease of doing business (attracting private capex), PLIs( private capital through incentives for import substitution or export ecosystem creation) and 4) Accentuated benefits to India due to global supply chain re-alignments due to geopolitics. This makes us very constructive on India equities with 3-5 years view.

Budget is just an occasion to re-access Govts commitment to broader medium term economic goals and it has fully passed the test once again!

Source: ICRA MFI Explorer