It has been a roller coaster ride for equity market investors in 2022. Amid rising interest rates, high inflation, and Russia’s invasion of Ukraine, the BSE Sensex swung around 13,000 points, hitting a low of 50,921.22 on June 17 and a high of 63,583.07 on December 1.
Overall, this year, the benchmark Sensex and NSE Nifty50 indices are up around five per cent as of closing on December 29. While the returns may seem muted, India’s stock market is among the few that will close in the green this year. It has strongly outperformed major markets; the US S&P500 index is down 20-odd per cent, and the tech heavy Nasdaq has tumbled 30 per cent. Similarly, markets from Japan to South Korea, Taiwan, China, Russia, France and Germany are down between 9 per cent to over 40 per cent this year.
“In 2022, the Indian market outperformed other global and emerging markets by a notable margin, which was primarily driven by the country’s robust economic outlook, despite multiple headwinds faced, such as the Russia-Ukraine geopolitical crisis, policy tightening, rising inflation and volatile FII flows,” noted Neeraj Chadawar, head of quantitative equity research at Axis Securities.
As the US dollar strengthened and liquidity tightened in most markets, foreign portfolio investors (FPIs) were big sellers in India and other emerging equity markets. In 2022, FPIs were net sellers in eight out of 12 months and till December 29, offloaded near Rs 1.22 lakh crore worth Indian stocks.
Despite the huge FPI selloff, Indian market got a boost from domestic investors. Mutual Funds saw net equity inflows of around Rs 1.5 lakh crore this year. The assets under management (AUM) of the mutual fund industry were at Rs 40.39 lakh crore as on Nov. 30, 2022.
“Retail investors now send about Rs 14,000 crore a month for participation in equity mutual funds through SIP (systematic investment plan). This has created a counterbalance to foreign flows,” pointed Kotak Mahindra Asset Management.
In recent times, even as lump sum flows have slowed, SIPs in mutual funds have remained strong. The large caps outperformed the small and midcaps. As of closing on December 29, the Sensex was up 4.9 per cent in 2022, the BSE MidCap index had gained one per cent and the BSE SmallCap Index was down around 2.5 per cent.
Also, the upside was not broad-based. Despite the Sensex, being close to its life high, only 5 per cent of the Sensex stocks are at their life high level, while the rest are languishing, pointed a study by Kotak AMC.
As we look forward into 2023, things are unlikely to change much, there will be volatility and gains may not be large. For instance, Emkay Global Financial Services sees the Nifty 50 at 19,500 and Sensex at 64,500 by December 2023. Compared to the closing on December 29, that is a little over 5 per cent upside on the Sensex and 7 per cent upside on the Nifty.
“The prevailing volatility in the global markets is likely to continue for some more time, especially in the first half of calendar 2023, before it sets on a more concrete trend. The direction of inflation, the dollar index, oil and commodity prices and the China reopening will further drive market fundamentals in the first half of 2023,” said Chadawar of Axis Securities.
Other analysts also echo similar sentiments.
“Higher-for-longer interest rates, and a sudden rise in Brent crude oil prices are potential challenges for the market in the next 6-12 months. A capex intensive budget by the government may spur investment; however, global and domestic growth uncertainties may act as an impediment,” said Sanjay Chawla, head of institutional research, Emkay Global Financial Services.
In 2022, banking stocks, especially state-owned banks, were the standout performers. With non-performing assets declining significantly, credit growth picking up strongly and valuations comparatively cheap, investors lapped up banking stocks. While, the BSE Bankex index is up more than 21 per cent this year, the broader BSE PSU index has surged 22 per cent. Shares of capital goods companies were also in favour this year as they are seen as a major beneficiary of the government’s continued capital expenditure push and various production-linked incentives. The BSE Capital Goods index has gained 17 per cent in 2022.
Meanwhile, investors stayed away from tech stocks, amid rising worries that a recession in the US would hurt their business in 2023. The BSE Information Technology index has plunged 24 per cent this year. Healthcare stocks also saw muted demand in 2022, coming off after a strong pandemic-driven 2020 and 2021; the BSE Healthcare index is down 12 per cent so far this year.
Where are the opportunities in 2023?
“We expect two themes to play out in 2023 viz. credit growth and capex, and thus sectors like BFSI (banking, financial services and insurance), capital goods, infrastructure, cement, housing, defence, railways could be in focus,” said analysts at Motilal Oswal Financial Services.
Kotak AMC also sees capex cycle revival; government focus on defence, railways and infra; real estate and home improvement; penetrating financial services; rural revival; consolidating industry leadership among key themes playing out.
“A decade ago there were dozen plus telecom operators; now there are four. Across industries such as banks, steel, cement, NBFC and aviation, we are seeing consolidation resulting into big companies becoming bigger and strong companies becoming stronger.”
The Kotak AMC analysts also see India capitalising on global supply chain shifts.
“We see a structural push to manufacturing coming from the China+1 strategy (a strategy in which companies diversify their businesses to alternative destinations other than China), and PLI schemes and the next decade may probably see the rise of India’s manufacturing sector, filling the missing piece in India’s growth puzzle,” it said.
Chadawar of Axis Securities said rural recovery is expected in 2023 led by moderation in inflation, softness in commodity prices, better farm income expectations, and higher government spending. Also, banking and financials could continue to be major themes to watch out for on account of improved economic outlook and the pickup in credit growth.
Motilal Oswal analysts note that a demand revival has pushed capacity utilisation levels to over 75 per cent and could fuel a revival in private sector capex next year.
The China +1 strategy could also fuel India’s exports, the analysts estimate. Between April-October 2022, India’s exports grew near 20 per cent to $444.74 billion from $371.98 billion in the year-ago period. However, imports have grown at a much faster clip at 33.8 per cent between April-Oct to $543.26 billion from $406.03 billion, leading to an overall trade deficit.
Furthermore, there are worries that the recession in developed world could hurt exports in 2023.
How the central banks move in 2023 will also be closely watched. The expectation is that the Reserve Bank will cut its benchmark repo rate further in February 2022, but then there is likely to be a prolonged pause. Similarly, the US Federal Reserve is also expected to lower the quantum of its rate hikes next year.
Higher global interest rates for longer could well drive more FPI money out of emerging market equities.
In such a scenario, asset allocation across asset classes like equity, debt, commodities and real estate could be important.
“This is the time to maintain a neutral allocation to equity and use any correction as an opportunity to enter. We suggest marginal overweight to large cap, and marginal underweight small and mid-caps,” said analysts at Kotak AMC.
