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Equity markets should be able to hold current levels with heightened volatility, as


Indian equity markets continue to be very volatile. The Indian economy was in a good shape when the stress period started. We had a combination of low interest rates, high forex reserves and strong economic growth. Retail interest was high in the stock market and sustaining. Retail investors have been coming to the market in a structural manner and this was enabling our stock market correlation with the West to reduce. Buoyant IT exports and FDI had accelerated reserve accretion. However, as the stress period has elongated, there is some impact on Indian macro as well.

The reasons for the stress which is mainly high oil prices (high inflation) and supply chain disruptions, have continued. Oil prices are high on account of the following reasons: Russia-Ukraine conflict and oil related sanctions on Russia now, Iran and Venezuela in the past, and reluctance of OPEC to increase production and curtailing an expansion of shale production in the US. This is not allowing the oil markets to perform naturally. China’s zero tolerance on Covid is worsening the supply chain issues.

Policy response in these uncertain times would decide the short-term course of the market. Continued high inflation is forcing the hand of central bankers. Inflation was believed to be transitory in the beginning and is now seen to be embedded. With the economy at full employment in the US, they seem to be ok to slow it down. India would also see monetary tightening, but it could trail the west on our growth imperatives and relatively lower monetary expansion that we witnessed.

Longevity of the stress period would cause incremental damage to relatively stronger economies. In the first round of stress itself, Turkey, China, Sri Lanka, Thailand and Pakistan, countries who compete with us in various sectors and have seen high stress and sharp depreciation in their currency. Some countries have defaulted and needed International Monetary Fund (IMF) intervention. Longevity of the stress is hence very important. Apart from views of the central bankers, the outcomes for the sectors and companies can also be very different for different periods of stress and this is contributing to the market volatility. Globally linked sectors like IT services would not be impacted for a limited period stress but longer period stress would cloud the prospects as growth outlook suffers. Banks would benefit in the immediate term from more lending opportunities. However, if the stress period continues, they could potentially see more Non-Performing Assets (NPAs). A shorter period of stress does not impact the earnings outlook materially while a longer period of stress would impair it.

table1Agencies

Our forex reserves have dropped to sub USD600bn. This has limited our ability to defend the currency and currency has weakened. Interest rates have also been increased.
Government can shield the weaker sections of the population only to an extent. It has lowered the taxes on fuels and cooking gas given the strong tax inflows. However, if it does more, then its capex may get impacted. Some of steps taken have hurt commodity businesses. Imposition of export tax on steel would reduce profitability and maybe postpone capex. Ban on agriculture exports have reduced the rural cheer. Higher government subsidies would increase fiscal deficit and cause up-move to bond yields.

We remain hopeful of situation improving from here on. The palm oil export ban imposed by Indonesia has been lifted. This should bring down edible oil prices. Shanghai covid situation does seem to be getting under control and chances of supply chain issues not worsening further are improving. Russia could call for a ceasefire once it has consolidated its hold on the important eastern and southern part of Ukraine. If the world responds by removing sanctions, it would help normalisation.

India is seeing a strong move up in earnings from FY20 onwards. Nifty EPS could touch 1000 by FY2024 from around 720 in FY22. IT, Banking and Commodities are the large profit pools in the country. Other sectors put together form the 4th profit pool. As yet, the outlook for IT and Banking has not been impaired. Steel may get impacted on export tax but aluminium and oil and refining spaces are benefiting from higher prices and recent government moves. The drop in prices of commodities should benefit users of commodities.

image2Agencies

As yet, demand seems to be sustaining quite well. We have seen commodity user businesses take prices increase in one form or the other. Consumer staples have reduced grammage. Cement companies have increased prices as have auto companies. Housing prices have also seen an uptick.

There is cheer in rural India on account of better agriculture prices and this should help consumption especially since their input cost has been shielded by govt subsidies. The cities should be witnessing better consumption as labour which had gone to cities has returned with opening-up after Covid and is finding work. Results of home improvement categories have been strong and they have indicated strong outlook also. The salaried have seen strong savings and are seeing wage increases in FY23 which should take care of higher costs for FY23.

If the outlook for FY24 sustains, the market should be able to hold its current level while it continues to show high volatility as it digests incremental news on Oil and supply chains and inflation. After the recent correction, there is a 14-15 per cent upside to 18,500 levels on Nifty50 based on 5-year average P/E. This should sustain. Present interest rate outlook and liquidity outlook would still keep end of the year numbers at more favourable levels vs 5-year average. It is not advisable to look at longer period PE levels for the index because the composition of the index has undergone significant changes and the more expensive spaces are now dominating the index. High inflation and oil prices are the biggest risk on the index and we would adjust the outlook by 2-3 per cent in the opposite direction for every USD 10 change in oil prices from USD 100 levels. Most of the external events barring oil are only causes of volatility. Our markets have been moving on our corporate results and our policy making for several years now, providing diversification benefits to global investors.



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