|Data as on 31st, March 2023|
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;
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.
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.
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.
What should an investor do?
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