2023 Boom or Bust?

As the first week of the new year comes to a close, let's discuss the previous one and our expectations for this current year. Sensex & Nifty, both broader indices, made a fresh all-time high in 2022. Indian market is ranked among this year's best-performing major stock markets globally. However, overcoming all the distress like the Russia-Ukraine war, Rising Inflation, and US Fed Rate Hikes led to an expected global-level economic slowdown. Here are the key highlights of the year 2022:

The economy in the Rearview Mirror

As we started the year, a post-Covid global economic recovery was gathering momentum, and supply chain bottlenecks were beginning to ease. But, in February, Russia invaded Ukraine, which created a new supply chain crisis. As a result, the price of crude oil touched $129 in March.

US Inflation rates were rising, but central bankers were reluctant to raise rates. The theory was that Inflation was "transient" and would fall when the economy normalized. The Russian invasion of Ukraine was the final nail in the coffin of the transient inflation theory. To control rising Inflation, the US announced seven interest rate hikes in 2022 which led the fed rate at the 4.25% to 4.5% range, its highest level in 15 years. RBI also hiked the Policy rate five times in 2022 to keep up with US Federal Rate hikes. The repo rate currently stands at 6.25 percent. The RBI hiked the rate by 190 bps(essential points) in 2022.

The roaring Inflation & aggressive rate hikes triggered currency volatility. As a result, the Dollar Index jumped from 94.6 to 114.7 during the first nine months of 2022. Subsequently, USDINR also depreciated by 11.7% to 82.7 level. Post-2013, this was the most significant depiction in INR.

Foreign investors have been sellers in the Indian equity market for the consecutive second year amid Rising Bond Yields & rising dollar index. During 2022 they sold stocks worth 2,78,429.5 Cr from Indian markets.

Market in the Rearview Mirror

Sensex & Nifty, both broader indices, made a fresh all-time high in 2022 despite the above-mentioned headwinds and gained 4.4% and 4.3%, respectively. The midcap index also gained 3.5%, but the small-cap index, where most retail investors invest, failed to perform and dropped by 13.8% in 2022.

IT was the Best performing sector in 2021, but this year it significantly underperformed and dropped 26.4 amid global slowdown fears. Pharma and Realty sectors also gave negative returns in 2022 and underperformed most other sectors. While Metal, Banking, FMCG, Auto, and Energy had provided positive returns in the range of 14%-22% in 2022. But the star Performer of 2022 was PSU Banks which delivered 70.67% returns with the help of better asset quality and impressive results.

Nifty has given lower single-digit returns during 2022. Meanwhile, from the Nifty50 pack, eight stocks had given more than 30% returns. Adani Enterprises has rallied over 125% this year, followed by Coal India (54%), ITC (52%), M&M (49%) Axis Bank (37.6%). In contrast, six stocks in Nifty had dropped more than 15% in 2022. Wipro was the worst-performing stock among the Nifty50, which tanked over 45% this year, followed by TechM (-43%), Divi's Lab(-27%), HCL Tech(-21%), Infosys(-20%) and Tata Motors(-19%).

Another highlight of 2022 was disappointment with extensive initial public offerings. Paytm and Policybazaar tanked more than 50% this year after their trading debuts toward the end of 2021. Other decliners include Zomato, Nyka, and Delhivery. Life Insurance Corp. of India, which surpassed Paytm to become India's biggest IPO, has lost more than a quarter of its value since May.

What to Expect In 2023?

The extensive effects of sharp rate hikes around the world will increase the cost of borrowing for corporates owing to that it is expected to disturb economic growth in 2023. but we expect Inflation to fall in 2023 as China's reopening can rapidly restore supply chain capacities during 2023. Subsequently, central banks may pause, and iRBI may likely follow them.

Despite global headwinds, the strength of the Indian economy is evident through various indicators. Both manufacturing and services PMI at 55+ on a sustained basis shows Improving consumer sentiment, which is quite the opposite to advanced economies like US & Europe. Substantial volume and compounded annual growth rate in the Production of steel and coal also indicate vigorous economic activity.

Government tax collections are likely to beat budget estimates. Also, Forex reserves are substantial, and external debt to GDP is low compared to other countries, which augurs well for the reform momentum of Economic growth despite the global slowdown.

Considering the rise in bond yield (which is higher than pre-Covid) and the increased chance of earnings downgrades amid a global slowdown in 2023, We feel the current Nifty PE multiples seem higher. From current levels, higher market returns are unlikely owing to higher valuations & expected earning downgrades. However, we might see some modest upside because of superior growth momentum in the economy relative to other major economies.