Data as on 31st, March 2023


Market Outlook
March 2023

Equity Markets

Markets: A Flattish year with devil in the details

We present a summary of changes in key Indian & Global equity indices
While Nifty and Midcap's indices were flat for the year, Small cap indices are down 14%. India outperformed most global markets for the year. Significant outperformance across sectors was observed in the Consumption space (staples and discretionary), followed by Banks. Technology, Real Estate and Commodities performed worst for the financial year.

We wish each of our investors a "Very Happy & Wealthy New Financial Year 2023-24". While FY23 may not offer a great reading on equity returns from Indian markets, one needs to see the big picture. FY23 was hurt by;

  • Economic headwinds on global and domestic fronts; Russia-Ukraine war, energy prices, a hawkish monetary policy of both the US Fed (450 bps hike) and the RBI (250 bps hike)

  • Markets consolidating on the back of 2 great years of equity market returns
  • Huge FPI selling of approx. 30bn$ for the year. Despite the quantum of selling, flat markets convey a healthy role domestic investors play in buying for the long term.

As we review what lies ahead for the financial markets in FY24, an apt summary could be the recent tweet by Bloomberg columnist Daniel Moss "It's still the Fed's world. We just live in it". History shows that financial markets move with investor sentiments influenced by Fundamentals (long-term, economic growth etc.) &/or Liquidity (short-term, monetary policy etc.).

For March 2023, Indian markets trended most of the month downwards, but the sharp rally in the last 2-3 trading days helped close on a flattish note. Sector-wise, Energy, Metals, FMCG, Pharma & Financials outperformed, while Auto, IT & Realty underperformed Nifty. Globally, the markets had sharp swings, with the interest rate and ALM issues in some US banks dominating the fundamentals, as higher rates impacted the viability of these banks.

The sentiments, however, changed for the better as the feeling of the Fed being forced to review the monetary policy stance dominated investor moods. US stocks had a nice rally post the Fed policy meeting, where it raised rates by 25 bps.

The NASDAQ led the rally in US stocks as investors bet on the Fed pivot. CY22 had seen NASDAQ correct by 33% as an increase in rates hit valuations of the tech sector.

While the Indian market has a connection with Fed policy (global sentiments, risk appetite, asset allocations, valuations etc.), the Indian economy has a direct connection with RBI's monetary policy.

RBI's stance impacts the cost and availability of money, which affects economic activities & GDP growth and the distribution of profit pool across sectors. RBI policy has been in a similar direction with Fed in the last three years, and we expect that linkage to continue when Fed moves to a stance of no more hikes or actual easing.

While the fundamental change in RBI's view will be known over the next 2-3 policy meets, we expect the economic growth to increase and corporate India's profit pool share to change as corporate borrowers get more comfort on interest costs.

Looking Ahead

If the Fed policy connects remain relevant in the short term, the economic growth and fundamentals remain in the medium and long time. The real story for India remains the rapid growth potential that moves the Indian economy towards the 3rd largest economy status.

This decade is expected to be India's story of economic growth with the building blocks (public sector infrastructure creation, private sector's industrial capex, compliance-led tax collection efficiency, PLI initiatives led job creation & China+1 strategy to get export market share) in place for the big leap forward.

India markets have had a time correction of 18 months. Indian markets look better on absolute valuations and a relative basis when compared to other emerging markets, especially China, post their Covid open-up rally.

The key issue impacting markets is the continuous selling by FPIs. While FY23 showed Indian investors' ability and willingness to buy, we need to see how FY24 plays out on demand and supply market dynamics, especially in the context of higher interest rates that can influence asset allocation.

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 move within large, mid and small-cap segments, then Flexi Cap and Focused funds could be considered.

Fixed Income Market

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

As we pen our monthly newsletter, the Monetary Policy Committee of the RBI kept the Repo rate unchanged at 6.50%, a first pause after a series of rate hikes. The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligned with the target, while supporting growth. Interestingly it was a unanimous decision for a rate pause and a 5 to 1 decision on the “continued withdrawal of accommodation “stance. The CPI inflation was projected at 5.2 per cent for 2023-24, with Q1 at 5.1 per cent, Q2 at 5.4 per cent, Q3 at 5.4 per cent and Q4 at 5.2 per cent, and risks evenly balanced. The MPC, however continued to warn “there can be no room for letting down the guard on price stability.”; the Argus eye on inflation continued.

The debt markets reacted favorably, and the benchmark 10-year gilt has moved down to around 7.20%. As we look through the past month of March, the benchmark 10-year Gilt rates had moved down by around 10-15 bps through the month with a softening bias across the curve. The inflation date printed on the higher side and the core inflation remained firmly entrenched above 6%, meriting a continued vigil by policy makers.

In the US markets, with problems emerging in some banks, witnessed a risk off trade with 10 years moving down by around 50 bps to around 3.47%. Gold also followed the risk off trade, touching almost an all-time high.

Looking ahead

  • We think the domestic rate cycle is close to its peak. While RBI , after today’s pause , will continue to maintain vigil over inflation ,may have a bit more rate, the markets have largely priced in such rate hikes, should there be any . With RBI projecting an 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 ; we think a sustained commodity slowdown may provide a respite to the retail inflation

  • The bear flattening of the yield curve specially in the 1-5 year segment has largely happened hinting at the possible end of the upward movement of the domestic rate trajectory
  • We also believe that AAA credit spreads are very tight and the probability of spreads to increase soon remains a distinct possibility
  • Liquidity being gradually normalized, the extreme 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 recession , which possibly also bodes well for fixed income allocation

What should an investor do?

  • While there have been tax changes announced in the debt segment , we still believe , beyond the tax changes , the merit for debt mutual fund investments continue.
  • We believe that the investors with a shorter time horizon of less than one year may continue investments in ultra-short term and low duration funds

  • Short term fund category may be suitable for investors looking to stay for a time horizon beyond one year with a lower risk volatility

  • For a investors who attempt to capture the interest rate cycles , an allocation to Dynamic Bond fund merits attention

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