Vijay Kumar Gaba

The first half of the year 2023 has been good for risk assets. Despite strong headwinds in the form of aggressive rate hikes, banking sector turmoil, political & geopolitical events and credit warnings, the stock market made a steady move up with very low volatility. Another notable feature of the global market movement in 1H2023 was the stark underperformance of emerging market equities as compared to the developed markets – even though the development markets appeared to be facing serious growth challenges and financial sector stress. The emerging markets like India demonstrated much stronger economic resilience and price stability.

Equities and Crypto recorded strong gains in the first half of 2023; while commodities (especially energy), USD and bonds lost some ground. The rally in risk assets though lacks belief of investors, as underpinned by high cash levels.

Though at present equity markets appear strong on the back of a resilient demand environment, easing geopolitical conditions, controlled inflationary pressures and peaking interest rates – the uncertainty levels continue to remain elevated. The confidence in the economic growth in the developed world remains low, while valuations seem to be discounting a strong economic recovery. Consequently, the conviction in the present stock price levels is low.

India performance – 1H2023

Indian markets performed reasonably well in the first half of the year 2023. Though Indian equities underperformed the developed markets in line with the global trend, it did very well within the merging market universe. The key highlights of the India market performance could be listed as follows:

·         The benchmark Nifty50 gained ~6% during 1H2023; while the Midcap (+13.5%) and Small Cap (+11.4%) did much better. Consequently, overall market breadth has been strong.

·         The markets were negative for the first four months of the year. It rallied hard in the last two months (May-June) to recoup the losses and post strong gains. Considering this, the rally in broader markets has been furious but lacked larger participation.

·         The total market capitalization of NSE is higher by 5%; much less than the gains in indices – implying that a significant section of the market may have actually lost significant value in the past six months.

·         The number sector underperforming the benchmark indices outnumber the sector outperforming. The rally was counterintuitively led by the rate sensitive sectors like Realty and Auto; while energy and PSU banks were notable drags. Consumers (despite visible rural demand stress) and pharma also outperformed. IT Services and financials were other notable underperformers.

·         Some Adani Group stocks, and Zee Entertainment etc were notable losers on corporate governance concerns; while some mid and small cap IT stocks were amongst the top performers for the period.

·         The Capital Goods and Heavy Engineering sector has been flavor for the period. Particularly, the businesses catering to sectors like defense, railways, and road construction did extremely well.

·         Indian equities have sharply underperformed the developed market and some emerging market peers like South Korea. However, it did better than BRICS peers and other emerging markets.

·         Institutional flows to the secondary equity markets were positive for the all six months. 1H2023 witnessed a total flow of ~INR1562bn, with FPIs contributing over INR696bn. The correlation of institutional flows with Nifty returns however remained poor (~40%).

·         The rates inched higher during 1H2023. Policy rates were higher by 60bps; while money market rates were higher on average by 70-75bps. Deposit rates did not see much change while lending rates were higher by upto 65-70bps.

·         The overall Indian yield curve shifted lower; though at the lower end (upto 1yr residual maturity) it lifted sharply higher as RBI continued to withdraw accommodation.

·         INR weakened against USD (-4%), EUR (-8.7%) and GBP (-9.1%) while it was marginally higher against JPY (+2.6%).

·         The economic growth surprised on the higher side with the Indian economy recording a growth of 6.1% in 4QFY23. Overall for FY23 India’s GDP grew @7.3%, much better than the estimates.

·         CPI inflation has inched closer to the lower bound of the RBI’s tolerance band of 4%-6% with May’23 CPI inflation number coming at 4.3%. The core inflation remained sticky at 5.4%.

·         Corporate performance has shown resilience in recent quarters, with sales growth recovering and margins bottoming.