Though FY2022 was a roller coaster year for the global equity markets, Indian stock markets were the top performers in generating returns for investors. The Nifty50 was the top-performing indices, compared to all major global markets. It generated returns of 19 percent during the financial year gone by, beating the global heavyweights like S&P 500, FTSE and Nasdaq.
The first half of FY22 witnessed strong performance from the markets but extreme volatility crept in the second half due to the US Fed’s stance towards interest rate hikes and tapering of bond purchase, the rising inflation and crude prices dented the sentiment even further while the Russia-Ukraine crisis overshadowed all other contributing factors to the increase in volatility and widespread correction in the equity markets.
Outlook for FY23
Experts unanimously agree to the fact that the volatility is likely to persist in the Indian equity markets at least in the first half of FY23 if not beyond and confirm that the underlying fundamentals of Indian markets are still intact. The rising interest rates and high inflation will be the major contributing factors to this apart from the direction in which the Ukraine crisis will unfold in the coming future.
This will likely keep the tide in favour of long-term debt funds for now with equity funds likely to regain their sheen in the second half which is when they expect the markets to move in the positive direction with confidence.
“We hope that this year investors should rationalise their return expectations as easy money making will be a tad difficult due to multiple reasons – heightened volatility in geopolitical tensions, commodity inflation which will impact corporate earnings growth in the near term, and subsequent rate hikes to curb inflationary pressures,” said Mohit Nigam, Head of PMS at Hem Securities.
Experts are of the opinion that the inflows from DIIs (domestic institutional investors) and retails investors will continue to support the Indian markets basis which they expect low double-digit returns in FY23.
Divam Sharma, Founder at Green Portfolio, expect the FPI selling in equities to halt and move on a positive trajectory in FY23. “We expect the Nifty to cross the 20,000 mark in FY23. The major contributors to the index, including commodities, oil, and IT, have tailwinds, while sectors like pharma, banking are looking attractive on valuations,” he said.
Experts also advise investors to exercise caution as the overall performance can remain muted due to high valuation & downside risk to earnings growth due to inflation.
“We can expect decent performance on a stock and sector basis based on the business pickup, moderation in inflation and valuations,” Vinod Nair, Head of Research at Geojit Financial Services, said. “The market is a mixed bag today as some pockets are attractive while some expensive, but the long-term vision of the Indian economy is robust.”
Sectors to bet on
Experts are extremely bullish on the defence, EV (electric vehicles) and IT themes and expect state-owned commodity companies to do well aided by improvement in margins due to a spike in commodity prices.
“In a year of war, we assume military defence spending would be increased all over the world, indicating growing demand for defence equipment,” said Prasanth Tapse, Vice-President (Research) at Mehta Equities.
The government’s “atmanirbhar Bharat’ initiative and growing demand for defence equipment will help the players in the Indian defence space to do well this year, he said. It is worth mentioning here, that for the first time, India is on the list of defence equipment exporting nation, exporting to more than 84 countries at the moment.
The new-age era of electric vehicles (EV) has already begun in India. Big investments are picking up with new manufacturing hubs, and an increased push to improving charging infrastructure along with the government’s support through PLI for setting up local battery manufacturing. India aims to scale up EV sales to 30 percent of total car sales by 2030 from less than 2 percent at present which gives a lot of headroom for EV players in India.
IT is also expected to do well as demand for digitisation could keep rising from enterprises who want to survive and prosper.
“Economics, jobs and personal lives are becoming more automated which becomes the direct growth factor of technology industry in coming years”, added Nigam from Hem Securities.
Nair from Geojit Securities, however, holds a contrarian view and suggests that, “the valuations of IT companies are on the higher side basis which their performance may be subdued compared to broad markets”.
Specialty chemicals and pharma-API players are other sectors which are expected to generate decent returns for investors.
“We believe that India is set to emerge as a hub of chemical and petrochemical industry globally and investment of Rs 8 lakh crore is anticipated in the sector by 2025,” said Tapse from Mehta Equities.
Sectors to avoid
The risk of higher commodity prices which leads to increase of input costs is likely to persist due to which most of the companies will face margin pressures over the next few quarters. Consumer discretionary and consume staples will continue to be impacted by the higher commodity prices and sluggishness in rural demand.
Rising inflation will force the central bank to reverse the trend of interest rates. In such a scenario sectors like auto and real estate are likely to get impacted the most as they are interest rate driven sectors.
“Microfinance can also be avoided for now as its customer segment faced the most hardship during the last two years,” said Sharma from Green Portfolio. Now inflation is also further impacting the sentiments when sustainable loan growth and decline in NPAs is likely to take some more time.
Needless to mention here that investors should avoid sectors which are having exposure in Russia especially till the time the situation becomes more conducive for business.
“Metals & energy are performing well today but may not sustain if war stops and global supply chain improves’ added Nair from Geojit Securities.
Mantra for Investors
Experts advise investors to moderate their return expectations in FY23, concentrate on quality stocks while reviewing/rebalancing their portfolio on a regular basis.
“Investors’ mantra in FY23 should be on proper asset allocation with a good mix of cyclical and defensive stocks. We are optimistic about the market for the coming year as almost all businesses have adjusted to the new normal and are back on track to Pre-Covid levels”, said Tapse.
Experts also advise investors to look at value opportunities in FY23 as they feel that there are many opportunities in the broader market for investors now.
“Patient approach will a balanced portfolio based on a stock & sector specific pick can lead to outperformance. Currently it is fair for investors to increase exposure in mid & small caps due to heavy correction in the last 5-6months”, added Nair. However, the investment in Mid & Smallcaps should be gradual with a stock-to-stock approach given the persisting volatility in the markets.
Diversification across sectors to reduce risks; decisions should be based on research about fundamentals of the stock and growth prospects; buying on dips and avoiding emotion based investment decisions can be few aspects, investors should keep in mind to limit their risk of losses in a volatile market.
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