The Nifty Index declined 3.6% in December, while the Mid-cap and small-cap indices did better than the large-cap indices and were down 2.5% and 2%, respectively. All sectoral indices closed negative, except for Metals, which was up 3% in the week on the news of China further easing the three-year border controls aimed at curbing Covid-19. Power, IT and Auto were the top losers, declining 6.8%, 6% and 4.8%. FPIs bought US$ 1.3 bn worth of Indian equities in the secondary market, while DIIs were net sellers.
Globally, all markets ended weak other than Hong Kong. Better-than-expected Q3 US GDP data further signalled more rate hikes by the US Fed. Other key developments in the month were (1) the RBI MPC hiked the repo rate by 35 bps to 6.25%, (2) BJP scored a resounding victory in Gujarat, whereas INC beat BJP in Himachal Pradesh, (3) the US Federal Reserve raised interest rates by 50 bps, (3) the Bank of Japan, in a surprise move, fine-tuned its ultra-accommodative monetary policy by widening the range for its 10-year government bond yield fluctuations.
Domestic high-frequency indicators, while healthy have moderated sequentially. Early data for Dec as indicated by GST collections and PMI manufacturing, indicates a sequential improvement. Indeed, PMI manufacturing rose to a 26-month high of 57.8 in December. However, external indicators remain weak, with export growth tracking at -2.2% in the three months ending November 2022 vs. 33.5% for the three months ending November 2021.
In a backdrop of increasing likelihood of slower global economic growth in 2023, resulting out of the aggressive rate hikes of 2022, India’s economic growth is likely to stay resilient but not without its own set of challenges. With the post-Covid opening up/pent-up demand recovery in the economy largely behind us, India’s economic indicators may take a breather in 2023 as it too re-adjusts to slowing global growth. Within domestic growth drivers too, India may take time for incremental levers like the resumption of rural demand and a fresh investment cycle to start making meaningful contributions. From an earnings standpoint as well, there is considerable dependency on recovery in profitability within many sectors from easing commodity prices as being an important factor. While this may play out to some degree, in our view, it has its own challenge, particularly in an environment of slowing growth and rising competitive intensity. Expecting a lagged rural recovery post-Covid is good in intent but relies on the probabilities of a strong crop season, higher food prices, and government support in a pre-election year.
Hence, while India’s economy is on a steady growth path relative to probably other global markets, this appears sufficiently baked when translated into corporate earnings expectations and with the earnings upgrade cycle of the last 5-6 quarters now levelling off, India’s valuations multiples may find it challenging to expand further. On current reckoning, we expect the next earnings upgrade cycle in India to commence in mid-2024 as the impact of the global slowdown wanes and India’s structural growth drivers assert themselves more meaningfully. For Indian equity markets, domestic flows have offered meaningful support in 2022, which may be at risk in 2023 in a scenario of high interest rates. Under such conditions, it is therefore, quite likely for headline returns in the market to be muted in 2023, much in the same way as in 2022. India, however, remains one of the best ‘buy on dips’ markets for investors focused on medium-term returns.
Our portfolio objectives remain firmly focused on medium-term returns without losing cognizance of short-term economic and market volatilities. Even though our preferred portfolio stance has been India-centric growth sectors for much of last year, but pockets of value may have started to emerge in some of the global-oriented sectors such as technology, pharmaceuticals and commodities. Taking a balanced approach at portfolio construction and ensuring adequate diversification appears to be the best way forward for 2023.