It was spring of the year 2022. The news flow was worsening every day. The Russia-Ukraine conflict was dominating the global media headlines. NATO-Russia acrimony was at its worst since the cold war era. China committed to a zero Covid policy and implemented strict mobility restrictions, further impacting the global supply chains. Inflation was beginning to spike and most central bankers were ready to embark on an accelerated tightening cycle.
Back home, the enthusiasm created by a path breaking budget had not survived even for a whole week. Issues like macroeconomics (growth, inflation, current account, yields, INR), geopolitics (Russia-Ukraine), politics (state elections) and persistent selling by foreign portfolio investors (FPIs) was dominating the market narrative. The trends in corporate earnings also were not helpful to the cause of market participants.
By early March 2022, the benchmark indices had fallen substantially from their highest levels recorded till then, between October 2021 and January 2022. The Nifty50 was down ~11%; the second most popular benchmark Nifty Bank was down ~16%, the Nifty Midcap 100 was down ~14% and the Nifty Smallcap 100 was down ~17%. Though technically, the market was still in ‘correction’ mode, sentimentally it did feel like a ‘bear’ market.
Amidst all the gloomy headlines and bearish forecasts, I felt that we are most likely to witness a boring market rather than a bear market in India during 2022 with breadth narrowing. (see here). Since then benchmark Nifty is higher; but it has mostly moved in a range occasionally violating the range on both the sides.
Since the beginning of 2022, Nifty50 (+1%) is almost unchanged and midcap (-3%) have performed mostly in line. Nifty Bank (+10%) has been major outperformers; while Smallcap (-20%) have underperformed massively. The market breadth has accordingly been mostly negative.
Nothing much has changed in the past one year - the geopolitical situation remains fragile; the war continues; inflation remains a worry; economic growth is decelerating; earnings growth is slower than anticipated; rates are higher and expected to remain elevated for long; monsoon is expected to be below normal; and FPI outflows continue. To add to this we are entering an intense election season that should culminate with general elections in March-May 2024.
However, the narrative now is not negative. At worst it is neutral. The war is now on the 13th page of the newspaper. It is neither mentioned in the prime time news headlines nor does it trend on social media. Central bankers have successfully anchored inflationary expectations and the popular discussion is around peaking of rates & inflation rather. The US and European recessions are not a consensus now. India growth is also estimated to be bottoming above 6%.
Given these fragile macroeconomic & geopolitical conditions; declining optimism over earnings growth; higher debt returns and optimistic equity positioning, it is important to assess what could be the market behaviour in the next one year?
In my view, we may not see a decisive direction move in Nifty50 in 2023. It may move in a larger range of 16200-20600 in 2023, averaging above 17600. We may therefore not witness a bear market in 2023. Smallcap stocks which have been underperforming for quite some time now may end up outperforming the benchmark Nifty50 for 2023; though gains could be back ended.
No comments:
Post a Comment