Strategic adaptation in turbulent times

stock market investment

The Q4FY23 results have been concluded, and the outcome slightly exceeded expectations. The Nifty50 index has recorded 15% YoY earnings growth, while the broader market has seen approximately 10% growth. Strong upgrades are seen for financials and auto, followed by marginal upsides in infrastructure, cement, and capital goods. The downside is noticed in IT, pharma, and metals. Although the overall numbers are favorable, the net effect on future earnings is subdued by the recessionary risk in the US and Europe, which depicts a slowdown in external demand and future revenue growth.  Despite the macroeconomic challenges and marginal projected slowdown of the Indian economy, the market maintains an optimistic outlook for FY24, with consensus expectation of 18% earnings growth for the Nifty 50 index.

In FY23, the Indian economy witnessed a real GDP growth rate of 7.2%, and the Nifty50 index recorded a 12% growth in earnings per share (EPS). Moving to FY24, the RBI expects a marginal slowdown in economic growth to 6.5%, while the market anticipates a better YoY corporate profit performance. This is a historic trend and also in the context of a moderation in raw material costs, China plus demand, and stable domestic demand. However, the observation is that whenever the global economy is in trouble, it does have a lag effect on the domestic market. Slower private consumption is being observed due to a moderation in pent-up demand and an increasing wealth disparity between affluent and impoverished segments of society.

The ongoing upside of the domestic market is supported by FII inflow. This is assisted by the fall in international commodity prices, which is expected to have a positive impact on both India’s fiscal and corporate earnings. Key commodities like crude oil, copper, and steel have well corrected in the past two months. These corrections will likely enhance profit margins on a QoQ basis, while the local demand scenario remains stable, resulting in immediate earnings growth. Secondly, global bond yields are moderating in anticipation of a halt in interest rate hikes. This trend encourages investments in emerging market equities, and India is poised to benefit from its improved fiscal and margin prospects.  Q4 GDP growth has been better than anticipated, and valuation has moderated during the consolidation of the last 1.5 years. Sustenance of the FIIs inflow will depend on the moderation of global risk, which is likely to increase in the short-term as the economy is anticipated to slow further in the second half of CY2023.

In a precarious economy and stock market scenario, the Indian equity market is neither expensive nor cheap. Today, it is hovering towards an all-time high with the support of FIIs and retail inflows under the threat of a global meltdown. India’s valuation is slowly expanding ahead of the long-term average, while broad earnings forecasts are inelastic due to a mixed outlook. Consequently, investors should prioritize capital safety, value-oriented investments, and stock and sector specific approaches that hold promise for the future.

The companies that are most likely to benefit from the current market conditions are those that have a stable demand outlook and are more oriented towards the domestic market. These companies will also have the edge to outperform the market by benefiting from the moderation in commodity prices by boosting future margins. Consumption-based businesses such as staples, consumer durables, commercial vehicles, and agriculture are likely to perform well in anticipation of a normal monsoon and a stable long-term outlook. In terms of value buys, the sectors that are lucrative on a long-term valuation are infrastructure, banks, pharmaceuticals, and power. These sectors are trading around their long-term average valuation and hold promising prospects for the future.

After a prolonged consolidation period of 1.5 years in the domestic stock market, there has been a notable resurgence of retail and foreign investors, which has provided leeway for the performance of mid & small caps. The latest rally is supported by a robust prediction of domestic economic growth, a normal monsoon (though El Nino risk persists in the later part of the season), and a drop in international commodity prices, which back up a rise in future margins.

First published in The Economic Times


Please enter your comment!
Please enter your name here