The benchmark indices in India are now trading
at their highest ever levels. In fact, in the past one year, India (+9.6%) has
been one of the best performing equity markets in the world, in line with the
emerging market peers like Brazil (+8%), Russia (+9%), and Indonesia (+7.5%)
etc. Only a few emerging markets like Venezuela (+107%), Argentina (108%), and
Egypt (+15%) have done much better.
For many Indian investors these statistics could
be meaningless. To some it may actually be annoying as the performance of their
individual portfolio may not be reflecting the benchmark performance. Regardless,
largely the equity market returns have been reasonable, considering the
challenging environment. It is therefore a moment to celebrate.
Once the celebrations are over, it would be
appropriate to ask ourselves “whether at ~18700, Nifty is adequately taking
into account all the factors that may impact the corporate performance, risk
appetite, liquidity and financial stability in 2023?” In particularly, I would
like to assess the risk-reward equation of my portfolio especially in light
of the factors like the following:
In the recent months several companies have
rationalized (or announced the plans) their workforce. A significant number of
highly paid workers are facing prospects of job loss. Anecdotal evidence
suggests that the uncertainty created by a 2% workforce rationalization could
temporarily impact the discretionary consumption plans of at least another 48%
employees who retain their jobs.
Reportedly, IT hiring from the top colleges in
India are likely to witness a 50% fall in 2023 (see
here). We might see similar trends in other sectors also as most
management have guided for a moderate growth in next few quarters.
My recent visits to several rural areas
indicated that discretionary consumption in farmer households has already been
impacted by poor income in the 2022 Kharif season. As per reports La Nina
(excess rains) conditions that impacted crops for the past four seasons, are
likely to persist through Rabi season, while the 2023 Kharif season might
witness El Nino (drought like) conditions. (See
here)
On the last count India had more than 115
million crypto investors (see
here). About two fifth of these investors were below the age of 30, thus
having a strong risk appetite. These investors had seen sharp gains in their
crypto in 2020-21m but apparently they are now sitting on material losses in
their portfolio.
A significant number of new listings,
especially from tech enabled businesses, are trading at material losses to
their immediate post listing prices. These businesses typically have a material
part of their employee compensation in the form of ESOPs. Many employees who
had seen substantial MTM gains in their ESOP values have witnessed material
drawdowns in their portfolio values. A few of them might be facing double
whammy of material MTM losses and tax liability.
A number of small and midcap stocks that jumped
sharply higher in 2020-21 have corrected significantly in 2022.
Obviously, the wealth effect created by the euphoric movement in stock and crypto prices has subsided to some extent.
This submission of wealth effect shall also reflect on risk appetite,
consumption pattern and investment behaviour of the concerned investors.
Lot of market participants are betting on
continued fiscal support to infrastructure & defence spending, and
incentives like PLI etc.
It is pertinent to note that the forthcoming
budget would be the last full budget before the general elections to be held in
2024. It is likely the government chooses to increase the social sector funding
at the expense of capital expenditure next year. The disinvestment program might
also be slowed down to avoid adverse publicity for the government. Imposition
of additional tax(es) or hike in capital gains tax could also be considered.
All these events could impact the investors’ sentiment.
The external sector has been weak for a few
quarters now. The trade deficit in October 2022 widened to a worrisome
US$26.91bn. Exports dropped ~17% in October 2022 on slower global demand; while
imports were still higher by ~6%.
Notwithstanding the efforts of the government
to improve trade account by import substitution and export promotion; the
exports have grown at a slow 4.3% CAGR in the past three years; whereas the
imports have registered 14.3% CAGR in the same period, resulting in larger
trade deficit. The external situation thus remains tenuous.
It is pertinent to note that the World Trade
Organization (WTO) has projected a sharp slowdown in world trade growth in
2023. (see here)
Obviously, the pressure on balance of payment will remain elevated in 2023.
Overnight (liquid) funds are now yielding a
return of ~5% p.a. Bank deposits are offering 5.5-6% return. Under the present
circumstances, at ~18700, the upside appears limited to 8-10% while the
downside could be much more than 10%. Obviously, the risk-reward equation is
not favorably placed at this point in time, and the opportunity cost of holding
cash is not bad. This could keep a lot of money waiting at the sidelines.
Higher cost of carry and margins have also resulted in lesser leveraged positions in the market.
The cash on the sidelines and lower leverage may keep the downside somewhat protected.