Data as on 28th, February 2023


Market Outlook
February 2023

Equity Markets

We present a summary of changes in key Indian & Global equity indices:

Indian markets trended downwards in line with global equity markets. Globally the market sentiments took a negative turn as commentary from US Fed regarding a course of monetary policy in CY23 suggests no rate cut possibility. As rates will likely remain higher for longer, the markets across asset classes (equity, bonds, currency, commodities, real estate etc.) are looking for a price adjustment to reflect the rate scenario. Sector-wise, Financials, FMCG & IT outperformed while Auto, Energy, Metals, Realty and Pharma underperformed Nifty. The news flow from China post the re-opening from covid remains mixed with any clear trends from the available data.

Indian economy grew in Q3 at 4.4% for GDP, marginally lower than estimates. Growth was led by GFCF growth of 8.3%, with private consumption growth weak at 2.1%. 3QFY23 real GVA grew by 4.6%, led by services growth of 6.2%, agricultural sector growth of 3.7%. The NSO maintained its FY2023 GDP growth at 7% (same as the first advance estimates). This makes the 4QFY23 implied growth rate 5.1%. The FY2024E GDP growth estimates are likely in the range of 5.75% -6.0 %. Key risks to growth estimate are lagged impact of the RBI rate hike, uncertainty on monsoon outturn and the slowdown in developed economies (hurting India’s exports).

Looking Ahead

India remains in a sweet spot as a bottom-up stock idea over the medium to long term. The growth trajectory is likely led by economic reforms, infrastructure creation, PLI & China+1 strategy, and the building blocks are in place for the move towards 3rd largest economy. The near-term headwind to the India story is the economy growing in FY24 at lower potential due to tighter monetary policy (India as well as global) & export dependency on global economic growth.

From the equity market perspective, the key issue is the relative valuations that Indian markets enjoy vis other markets. Hence the relevance of tracking FPI action while they have an option of choosing India’s longer-term growth vs near-term value in some other countries. The choice in the recent past has been a selling in India to invest in other markets, and the quantum of selling is low, hence the belief that core allocation to India remains relevant for FPIs.

We have witnessed constant sector rotation playing out in cycles of 6 months at max, with broad market indices remaining unchanged. This is partly a case of economy normalising and excessive leverage in markets where investors have turned traders for quick gains by taking recourse to leverage. When in such a consolidation mode, markets offer stock selection opportunities over sectors. Companies with earning resilience and cash flows could be better investment opportunities at present.

Historically we have seen that markets when in consolidation, are a perfect case of buying equities as an asset class. When investing over a 3-5-7 years timeframe, Large, Mid & Small as a category may give reasonably similar returns, especially when considering associated volatility. However, if investors believe in fund managers' ability to make moves within large, mid and small-cap segments, then mandate like Flexi Cap & Focused may be suitable for them.

Bond and Money Market

We present a matrix detailing some movement in some key market rates (domestic and global) and key events:

February is usually a busy calendar for financial markets as the Budget, and the Monetary policy committee are scheduled. The Budget was largely positive, with the Government adhering to the fiscal prudence trajectory, conservative revenue projections and a significant tilt towards capital expenditure. What the debt markets would look at askance is the dependence on small savings to fund the deficit, which may be challenged by other fixed-income products offering similar returns and, thus, a possible shortfall in flows through small savings schemes. The subsidies would also be looked through carefully as high commodities may put upward pressure on the subsidies payout.

The MPC raised rates by 25 basis points (bps) to 6.50%, with the monetary policy stance remaining unchanged. The RBI maintained its inflation forecast for the next fiscal year primarily to around 5% to 5.50%. It also lowered the GDP growth to 6.40% for the next fiscal year.

The domestic CPI data was printed at 6.52 %, with the core remaining sticky at 6% plus. This number was ahead of the street estimates, and the markets started selling off. The benchmark 10-year gilt increased by around nine bps to close at 7.43%. Further, with the US continuing to show robust numbers, the US ten-year sovereign also sold off hugely through the month, with the US ten-year gilts moving up by around 31 bps to close at 3.92%.

Looking ahead

  • The domestic rate cycle is close to its peak. While RBI may have a bit more rate hike cycle up its sleeve, the markets have priced mainly in such rate hikes. With RBI projecting inflation of 5% in the second quarter of fiscal 2024, the time is now apt for looking into fixed-income products across all duration segments. With commodity prices, crude and agri commodities softening through the past few months, a sustained commodity slowdown may provide a respite to retail inflation.
  • The bear flattening of the yield curve, especially in the 1-5 year segment, has primarily happened, hinting at the possible end of the upward movement of the domestic rate trajectory..
  • AAA credit spreads are very tight, and the probability of spreads increasing soon remains a distinct possibility.le
  • Liquidity being gradually normalized, the extremely short end of the yield curve will also remain under pressure.

  • With US Fed trying to engineer a soft landing to the economy, there has been historically no precedence of inflation remaining high after the recession, which also bodes well for fixed income allocation.

What should an investor do?

  • Investors with a shorter time horizon of less than one year may continue investments in ultra-short-Duration and low-duration funds.
  • Short term fund category may be suitable for investors looking to stay for a time horizon beyond one year with lower-risk volatility.

  • For a long investment horizon and with a suitable risk appetite, an allocation to a Dynamic Bond fund merits attention

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.