For the third month in a row, Indian market indices delivered negative returns, significantly affecting mood. The BSE 500 dropped 3.2 percent in December, another 3.4 percent in January, and now 2.9 percent in February.
This is even though the Budget was extraordinarily positive, with the fiscal deficit reduced and a record capex of Rs 10 lac crore on infrastructure to keep economic activity humming. But the market is unwilling to focus on long-term benefits. It seeks immediate gratification, with sentiments centered around interest rates and new El Nino concerns.
Fed and RBI Hint at More Rate Hikes
The Fed and RBI not only raised interest rates by 25bps in their most-recent policy meeting in February, but they also signalled that additional rate hikes are on the way. Both expressed concerns about core inflation, which they believe will be sticky. They will only pause when they are completely convinced that inflation will fall to their desired level. They don’t expect that to happen, at least not in the first half of 2023.
Most analysts, including me, were expecting that we were nearing the end of rate hikes from the Fed and RBI. What is worrying the market is the lack of clarity about how many more rate hikes the Fed and RBI will make. According to news from the United States, the Fed will raise interest rates two more times in addition to the one hike scheduled for March 22nd, 2023. That means the Fed might raise rates by 100 basis points in 2023, in addition to the 425 basis point increase in 2022. In my recent webinar event, I discussed the possibility of a correlation between Fed and Reserve Bank of India (RBI) rate hikes. Click here to view the snippet!
El-Nino’s Potential Impact
The current forecast indicates that El Nino will affect India during the Southwest monsoon. According to the US government agency NOAA, the El-Nino condition would be present by July, affecting India’s monsoon and lowering Kharif Agri output and pushing up food inflation. The recent heatwave is expected to have an impact on Rabi crop output, since many northern states, including Punjab, have seen extremely high temperatures. This will impact wheat output on the same line as last year.
The rural economy is already struggling, and a weak monsoon would be another blow to the rural economy, raising inflation and further burdening the fiscal deficit.
By mid-April, we will have a better understanding of El Nino. News on this front will keep the market on tenterhook.
Fortunately, we have a government at the center that can manage the situation if there is a monsoon deficit. Please keep in mind that a monsoon deficit does not imply that the market will plummet. We received below average rain in 2004, yet the overall market gave double-digit returns.
Adani Group Continues to Struggle
There is no reprieve for Adani Group companies. It performed poorly in 2023. As a result, the group’s future funding is in jeopardy because investors and lenders’ confidence has been undermined. I understand that many retail investors are tempted to go bottom fishing, but our advice is to stay clear of the group because we believe that risk reward is not in favor of reward.
Good News in December Results
India Inc had a difficult quarter since the global scenario was demanding, with interest rates climbing quickly. Nonetheless, India Inc. has demonstrated amazing resiliency and posted a good set of numbers. Quarter on quarter, sales increased by 1.3%, while net profit improved by 11.8%. When we look at YOY, sales increased by 17.4% and net profit by 4.7%.
There was no sense of doom and gloom in any of the sectors. Many of them are positive about the future and have not announced any capex reductions. Post the December numbers, no material cut in the EPS for FY2023 suggests that Nifty 50 EPS is likely to be in the region of Rs. 815, implying a valuation of 21.4x. For FY2024, Nifty 50 EPS is expected to be at Rs. 980, giving a forward P/E of 17.8x. With a ROE substantially higher than the 10-year average, the Nifty has plenty of room to grow in the coming 12 months.
Short-Term Outlook Hazy
The last three months have really tested investors’ patience, frustrating many of them. This market needs a dose of encouraging news to improve sentiments. It is necessary to determine where that will come from. But overwhelming pessimism is affecting even cash volume on the bourses. In recent months, the NSE’s cash volume has steadily declined. The average daily volume on the NSE was Rs. 57000 crores in November, Rs. 52766 crores in December, and Rs. 48000 crore in January. It improved marginally in February but remains below Rs. 50000 crores, with a few days falling below Rs. 40000 crores. The level of pessimism is so high that investors are uncomfortable buying on the dip.
Be Greedy, Prepare for Upturn
That reminds me of Warren Buffett’s famous quote, “Be greedy when others are fearful”. I understand how difficult it is to be greedy, but going against the herd mentality is the key to generating money in the market. Recent events should not impair your decision.
In the medium to long run, everything should be fine. The Indian equity market has weathered this uncertainty many times and has emerged stronger.
Rather than focusing on the current downturn, investors should think like businesspeople who are preparing their companies for the next upturn. A smart businessperson will invest in capital expenditures not during the best period for the sector, but during the worst moment, so that he can reap the rewards of the upcycle when capacity comes on stream.
Extreme pessimism in the market is a favorable sign rather than a bad one for investors since it allows them to buy good quality businesses at relatively lower valuations.
I urge you to be greedy and not allow negative sentiments impact your decision-making. Let me borrow a famous phrase from a well-known aerated beverage manufacturer: Darr ke Aage Jeet Hai.
Sunil Damania,
Chief Investment Officer – MarketsMojo