After two years of disruptions, uncertainty and volatility, FY23 appeared a rather normal year. Both the markets and the economy regained a semblance of normalcy in terms of the level of activity, trajectory of growth, direction, and future outlook. Though, it would be inappropriate to say that skies are blue and bright; it can be reasonably stated that we have reverted to a market that is no longer euphoric.
Pendulum swinging back to equilibrium
The global economy that witnessed two years of extreme pessimism followed by a period of steroid stimulated exuberance began to normalize in FY23. Central bankers began the process of normalizing monetary policies by withdrawing liquidity and hiking rates. The broken supply chains have been mostly restored. Inflated asset and commodity prices are returning to more reasonable levels. The organs of the global ecosystem which were infected badly by the excessive liquidity, irrational exuberance and unsustainable stress are now getting amputated. For example, we have already witnessed in FY23—
· A large number of tech startups built on unrealistic assumptions and traded at astronomical valuations materially downsized, downgraded or weeded out of the system.
· Energy and metal prices revert to pre Covid prices, commensurate with the economic activity.
· The global shipping freight rates that had jumped to unsustainable levels have actually corrected back to below pre Covid levels.
· Central bankers hiking rates from near zero levels to the highest levels in a decade.
· Some financial institutions that thrived purely on easy liquidity, without forming a strong commercial base, facing the prospects of getting eliminated or downsizing.
The Russia-Ukraine conflict that dominated the headlines during the first half of 2022 has been mostly relegated to the inner pages of the newspapers. The energy and food grain markets that witnessed huge disruption due to the conflict have mostly normalized.
Following the law of physics, the pendulum may be swinging from one extreme to the other extreme in many cases. Of course it will settle in a state of equilibrium over the next couple of years.
Indian economy normalizing
Most spheres of the economic activity in India have recouped from the sharp decline due to the pandemic induced lockdown. Vehicle sales, mining, construction, travel, hospitality, cement and steel sales, power generation, freight movement, port activity etc. are all at or above pre Covid levels. The Indian economy is expected to grow ~6% in FY24, on a normalized FY23 base.
The bank credit growth that was languishing for almost five years has picked up. The financial sector has mostly recovered from the debilitating asset quality issues.
The capacity building, especially in the core infrastructure sector, is showing signs of accelerated growth. Many key infrastructure projects that have faced material delays, e.g., Dedicated Freight Corridors, are now closer to completion.
Market performance for FY23
For equity markets, FY23 was a year of consolidation. The benchmark Nifty50 yielded a marginally negative return (down 3%); whereas Nifty Midcap was mostly unchanged and Nifty Smallcap lost 14.5%. Thus, the abnormal gains made in the past couple of years have been normalized to some extent.
Some highlights of market performance in FY23 could be listed as follows:
· Underperformers of the past three years, PSU Banks, FMCG and Auto sectors were the top outperformers for FY23; whereas Media, IT, Realty, Metals, Pharma and Energy sectors were notable underperformers.
· For a period of 3yrs, Metals, Auto and IT are still the top performing sectors in the Indian markets.
· Nifty50 yielded negative returns in 8 out of 12 months in FY23 – Jul '23 being the best month and Jun’23 being the worst month. A monthly SIP in Nifty50 during FY23 would have yielded a negative return of 2.1%.
· India’s performance was mostly in line with the Asian peers like Indonesia, South Korea, Singapore, Japan etc. in local currency terms.
· The market breadth was negative in 9 out of 12 months in FY23. Overall, the market breadth was negative.
INR weakened against USD & EUR
Despite challenges on macro (higher fiscal and current account deficit and inflation) INR remained mostly stable. It weakened ~8% against USD and ~6% against EUR, and was mostly unchanged against GBP and JPY.
RBI hiked aggressively, transmission pending
RBI hiked the policy rates aggressively from 4% at end of FY22 to the present 6.5%. However, the rate hikes have not been fully transmitted to the markets so far. The Average Base Rate of scheduled commercial banks has increased around 140bps from 7.25% - 8.8% to 8.65% -10.1%. Similarly the term deposit rates have increased from 5%-5.6% in March 2022 to the present 6%-7.25%. There is no change in savings deposits rate of 2.7% -3%.
Foreign investors remained net seller
Foreign portfolio investors (FPI) remained net sellers in Indian equities for the third consecutive year, selling over Rs626bn worth of equities in the secondary market.
The domestic institutions (DII) remained net buyers. With highest ever annual net buying of Rs251bn. DIIs were net buyers in 10 out of 2 months.
The net institutional flows (DII+FPI) in Indian markets were positive in 11 out of 12 months; even though the market yielded negative return in 9 out of 12 months in FY23.
Valuations more reasonable now
Nifty EPS is expected to grow ~15% in FY24, over and above a similar growth in FY22 and FY23. Negative in movement in FY23, has thus moderated the one year forward valuation of the benchmark Nifty50 closer to its long term average of 18x. Mid and smallcap valuations have also corrected accordingly.
The premium of Indian markets as compared to the global emerging market peers has also somewhat rationalized after the recent underperformance; though it still trades at a decent premium.
