Stock market outlook 2023: Buying remains in bear market in India

 

• India's past outperformance may provide relief in H1CY23, given the relative valuations. Deepak Jasani of HDFC Securities said India has better growth potential than most parts of EM

As we enter 2023, let us look at some of the broader positives for India. Investment in GDP at 33% in FY23 vs 30.5% in FY21. We are seeing more spending by the government on infrastructure, railways, roads and defence; Real estate sector showing recovery with housing sales figures surpassing pre-pandemic levels; PLI-driven investing has just begun; EV and renewable energy is witnessing continued thrust and investment; At the same time, supply chains are being consciously decoupled as national security concerns outweigh economic efficiency. This will create opportunities for diversification proponents including India and ASEAN.

On the other hand, what is worrying for India is that core inflation remains at 6% YoY with most items not seeing any moderation. Inflation is likely to come down permanently in FY24 itself. Revenue expenditure is expected to exceed BE on account of MGNREGA spending and subsidies. The current account deficit widened to (1.2% of GDP) in FY22 and is expected to widen further to 3.3% of GDP in FY23 and settle at ~3% in FY24 amid a high trade deficit. This puts pressure on the rupee. This one factor can cause volatility in stock markets due to its effect on interest rates, inflation and fund flows.

Earnings are slowing due to a deep and widespread US recession and the resulting rise in USD could also put pressure on the BoP (balance of payments); A resurgence in oil and fertilizer prices due to supply constraints could lead to inflation and higher rates. India's fiscal deficit (central and total) is unlikely to return to prudent levels soon after the post-Covid breach. This may attract action from rating agencies, apart from making inflation a difficult beast to control.

Emerging markets are likely to benefit from a relatively benign world in 2022. However, looking at relative valuations, India's past outperformance may provide relief in H1CY23. That said, India has better growth potential than most parts of EM due to a relatively strong macro environment. A series of policy reforms implemented in recent years have laid the groundwork, while further policy action has empowered people and promoted financial savings, directing inflows into equities.

History tells us that globally stocks will not come down until the US Fed cuts rates. Indian markets have always traded at high P/E ratios (the average 10-year earnings ratio for Nifty was 16x a few years ago and is now above 18x). This high number can be attributed to several other reasons, one important being the fact that India is a highly diverse market, with meaningful representation from almost all sectors. This provides greater flexibility to overall earnings, as a bad cycle in one industry is offset by another better performing segment. However, we believe there are downside risks to FY24 earnings and there is limited upside potential for valuations. It will be reverse for index capped. This view may change if we see that economic growth is picking up and interest rates are rising rapidly across the world and in India as well. India remains a buy on the dips market.