Global Economy and Stock Markets
The U.S. economy and stock market continued to struggle in the quarter gone by. Economic uncertainty may have peaked in 1st half of 2022 but it still remains high. US stock markets continue to feel the weight of Federal Reserve policy tightening, shrinking market liquidity and slower economic growth and were down by ~25% as of Sept 2022, their worst performance since 2002.
The world’s 2nd largest economy is facing a series of headwinds including protracted COVID curbs, global recession risks impacting exports and a property downturn. The effects are yet to be seen as the government tries to revive economy and give support to the struggling property sector.
Inflation, which is the center point of concern has started to decline with October data showing lowest inflation figures since Jan 2022. This has resulted in hopes of Fed reducing its aggressive tightening policy as early as Dec when the odds for a 0.5% rate hike have increased significantly.
As per Reuters, growth seems to have likely slowed to 6% in 3rd quarter vs 13.5% in 2nd quarter. However, India still continues to be the fastest growing economy in the world.
Further, with GST collections of more than Rs 1.5 lakh Cr for October, IIP growth of 3.1%, resilience in manufacturing PMI shows no slowdown in production/orders, bank credit growth of 18% in September 2022, monsoon being 7% above normal, and retail inflation for October falling to a 3-month low of 6.77% shows that Indian economy is a bright spot amidst the global economic gloom.
Indian Stock Markets
Having emerged as a safe heaven amid this year’s global equity rout, Indian stocks look poised to extend their lead over world peers and finish 2022 on a high. A return of foreign investors is bolstering the markets as the benchmark index rose to an all-time high a couple of days back. Foreign investors have added a net $2.5 billion so far this quarter after withdrawing $6 billion in the previous three months.
With better than expected earnings performance in Q2’23, focus now shifts to global news and events. Hence, we expect markets to remain volatile in the near-term driven by macro news but looking at the underlying strength in Indian economy, we feel the downside if any will be limited.
Corporate Performance (Q2’23 results):
As India moves past another quarter of uncertainty and high inflationary pressures, the earnings show for the recent quarter was a mixed bag with almost 60% of companies so far having either met or delivered above expectation results.
Revenues for 2275 listed companies across all sectors were up by 22.3% Y-o-Y mainly due to increase in prices whereas net profit during the same period was down by 6.3% on the back of higher cost of raw materials and energy prices. Notably, this is the 1st quarter of decline in India Inc’s quarterly earnings since April-June 2020.
Growth during the quarter was mainly led by BFSI, Auto and Auto Ancillary, Capital Goods, Paper, Hospitality and Retail whereas Cement, Metal, Consumer Durables, Pharma, Oil & Gas and Media were the underperforming sectors.
Most management during their post-results concall have remained cautiously optimistic for demand revival in H2’23 whereas they expect EBIDTA margins to improve sequentially on the back of reducing commodity prices.
While we have seen Nifty/Sensex almost touching all-time highs, our portfolios show a very contrasting picture with significant underperformance over the last 2-3 months as the recent market rally has been driven by financials and select bluechips whereas rest of the market has been very narrow (Small and Mid-Cap indices have underperformed Nifty/Sensex by more than 5% in Oct and Nov so far)
The above data of underperformance by Small and Mid-cap gives us confidence that companies having strong near-term visibility are favorably placed with attractive risk-reward ratio. Further, different sectors/companies are affected differently due to the current global uncertainty, hence we expect stock specific action to continue and expect domestic focused companies to fare better in the short-term.
We would like to end the update with the following quote:
“Investing is the age old, never ending emotional battle between
‘FEAR of future’ and ‘FAITH in future’”
– Nick Murray