What to expected from Indian stock markets in 2023 as performance cools

 

Indian stocks that offered global equity investors an escape from crippling losses in 2022 look set to lose momentum next year as sky-high valuations weigh on market euphoria.

Indian stocks that had offered global equity investors an escape from crippling losses in 2022 are set to lose momentum next year as sky-high valuations weigh on market euphoria.

This is the consensus of analysts and strategists, who also expect the rupee to broadly underperform emerging-market currencies and the country's bonds to benefit from inclusion in major global indices.

If there is some improvement in global growth and sentiment, "in 6-12 months some of these markets which are oversold may outperform India as India has done so well in last 18 months, said Hiren Dasani, Managing Director, Goldman Sachs Asset Management. "But India will do better in the medium term because of the compounding opportunity for growth."

Here's what to expect from the Indian markets in 2023:

valuation challenge

While India has been an exceptional market this year, with the NSE Nifty 50 index up 7% compared to an 18% decline in global stocks, it remains the costliest in Asia. Goldman Sachs Group Inc. Strategists said this means the performance of the Indian stock market will lag behind that of China and Korea next year.

Citigroup Inc. The Nifty target of 17,700 by the end of 2023 is about 5% from Thursday's levels. The blue-chip benchmark trades at just 20 times forward earnings estimates, compared to about 13 times for the MSCI Asia Pacific index.

"We are cautious on India due to high valuations," analysts at Jefferies Financial Group Inc., including Akshat Agarwal, wrote in a note this month.



Still, Citi said Indian listed companies are adept at converting economic growth into earnings per share and this cyclicality is limited. "India is likely to lag behind any pro-cyclical rally, but we appreciate this sustained delivery," analysts wrote in a recent note.

Goldman Sachs has a contrarian target of 20,500 for the Nifty for the same period, which is almost 10% upside.

rupee headwind

The Reserve Bank of India is likely to use every opportunity to rebuild its reserves as flows return to emerging markets, a move that could put pressure on the rupee.

India's monetary authority has seen its reserves decline by $83 billion this year as it sold dollars to support the rupee and its other foreign holdings went down in value. This helped limit the currency's decline against the dollar to nearly 10%, keeping losses in line with emerging Asian peers.

“We anticipate that central banks that have low reserve stock levels and/or have seen significant drawdowns in their current accounts, including India, Malaysia and the Philippines, will use the opportunity to replenish reserves, providing scope for appreciation. limited," analysts at Sachs Group Inc., including Goldman's Danny Suvanpruti, wrote in a note.

ING Group NV sees the rupee at 83 by the end of next year while Goldman sees it at 82 over the next twelve months, largely in line with current levels. On Thursday, the rupee was around 82.40 per dollar.

Nevertheless, analysts at JPMorgan Chase & Co see further pressure on the currency in 2023 due to India's trade situation.

"The trade balance is likely to double next year amid higher energy imports and lower exports," a team including Meera Chandan wrote in a note.