Is India losing its stock market dominance?

The year 2022 was one of the worst years as far as the Global equity investor was concerned with most world equity markets giving negative returns. MSCI World index was down ~20%, NASDAQ down over ~30%, China 22-24%. The Indian market held up in rupee terms but with the depreciating rupee in dollar terms was down ~8%, much lesser than most global indices and outperformed the world. However, 2023 seems to be rewarding those indices which have been hurt the most last year. India is down ~4%, whereas MSCI World is up almost 8%, China 9% (16% in the last three months), with China announcing re-opening up of its economy.

As on 15th Feb’23 (Source- Bloomberg)

Key reasons for this underperformance we believe are (a) Fall in the change of rate of rising Interest rates and an expectation of a PAUSE in interest hikes 2H2023 with starting in 20204; (b) Falling Inflation rates (c) Relative valuations become appealing for rest of the world as compared to India which in its peak was over 100% premium to EM.

The US currency also had appreciated almost 8% versus most currencies and 10% versus India, which in 2023 so far has been stable. The DXY correction of 10% from its peaks of 115 also gives the Global and Indian investor reason to cheer.

This led to FIIs exiting as much as US$ 4bn from the Indian markets YTD.

(Source- Bloomberg)

Hopes from the Indian Budget?

Hopefully the Indian Budget has given a lot to cheer for the investor by it not being a Populist budget, but a Prudent one on the fiscal front, which showcase the way the Government would lower it Fiscal deficit to 4.5% by F26 from 6.4% in F2023 to 5.9% in F24. The Assumptions for FY24 taxes appear real: The FY24 nominal GDP growth estimate of 10.5% is in-line with our expectation, and we believe if the global economies revive in 2H India growth can be higher. Also the Revenue assumption of 12% after a growth of 31% in F22 and 10% in F23 seems to have been underplayed. The expenditure growth of 8% with a focus towards capex, has improved the quality of government spending. The Central Govt and PSI capex spend together now account for 4.9% of GDP for F2024 the highest ever, Up 32% YoY.

What is Our Take on 2023?
As 2023 progresses in 2H2023, we believe key investor debates will focus on falling commodity prices contributing to positive earnings revisions vs weakening demand weighing on Revenue. Earnings environment is likely to get worse before getting better from 2H-23. Key risks for India remain – Oil Prices, Current Account and INR. We believe those companies which a) Gain from rising interest rates which remain higher for longer b) Gain from a falling commodity price in its raw materials c) Manufacturing or MAKE IN INDIA stories would be the key winners in 2023.

3QF23 Results which have come in showcase a growth of 7.4% in profits for the NIFTY 500 names; however had we to remove the financials most of which are having a dream run in earnings, the earnings fall 10% YoY though it is still a healthy 15% cagr over 3 years. Commodity prices have hurt most cos in 3QF23 with margins falling 200 bps YoY back to three year ago levels of 14%. This can reverse in 4QF24. Banks our key favourites in such an environment and their 3qF23 reiterate our stance. Indian Banks delivered a stellar quarter with a PAT growth of ~47% YoY for those in NIFTY 500 led by a stable loan growth of over 19%, increase in yields of ~56 bps, and despite cost of funds increasing by ~26 bps margin expanded a handsome ~17 bps. Margin expansion was on account of faster repricing of loans in the rising rate scenario vs deposits that get repriced with a lag and a shift towards relatively higher yielding loans. We believe that margins could come under pressure from the next couple of quarters as deposits start getting repriced to higher levels. We therefore like banks with a stronger liability franchise. We are in a benign asset quality cycle with a downward trend in NPAs and credit costs across banks, making it one of the best times for earnings for the banking sector.

(Source- Capitaline)

( The author, Vinay Jaising, is MD, Portfolio Management Services, JM Financial Services Ltd)