October witnessed stability – After a strong recovery in month of July and August of
cumulative 12.5%, the Indian markets witnessed profit booking in September and
October months, posting negative returns. More importantly, the FIIs remained net
sellers in October month and MFs continued to remain net buyers. The markets
continued to correct in in the first half of October but in the second half it was nearing
its all-time high levels post cautious commentary regarding the inflation and the
measures to tackle it. Going ahead, we believe that the FIIs will return owing to strong
growth outlook compared to other global nations.
Hawkish commentary by US Fed members led to increased volatility in October– At
the latest FOMC meeting, Federal Reserve Chair, Jerome Powell said that the
FOMC’s primary focus right now is to bring inflation back down to 2%. At the most
recent meeting in November, the FED raised the target range for the federal funds
rate by 75bps to 3.75% - 4.00% and it further intends to increase it to 4.40% by end
of this year.
India's growth recovery continues –Although India’s Q1FY23 YoY GDP growth of
13.5% appears low owing to the impact of the second wave in the base quarter
(Q1FY22), it is pertinent to note that the economy has crossed the pre-pandemic
level. As per data, economic activity is showing signs of broadening and the overall
demand environment is improving leading to moderation in inflation further boosting
positive sentiments. As for high frequency indicators, the PMI Manufacturing was
observed at 55.1 in Sept’22, which continued to remain in line with the last 12-month
average reading. GST collections at ₹1.52 lakh crores in Oct’22, marked the 8th
consecutive month of ₹1.40 lakh crore+ collections.
Falling crude/commodity prices to provide relief – We believe that the current
scenario of a weaker global economic outlook due to recession fears lowers the
chances of a significant spike in crude oil prices which have corrected ~24% over
the period of April’22 to Sept’22. So, the falling crude oil prices are to certainly
benefit the Indian companies which were impacted heavily on the margin front over
the past few quarters. Going ahead, this cooling of commodity prices would not only
prove to be tailwinds but also aid in containing overall inflation and spur demand.
Maintain a positive view from a longer-term perspective – We believe that India is in
a relatively stronger position vs. other Advanced and Emerging economies that are
experiencing high inflation and lower growth. A lower devaluation of our currency
compared to other emerging nation’s currency is also a sign of strength and
resilience in our economy. Moreover, our strong fundamentals and external position
are expected to drive further investments and cushion us from external shocks,
respectively. At current levels, the Nifty is trading at a P/E multiple of 18.5x (Source:
Bloomberg) on rolling one-year consensus earnings, which is near its 5-year average
of 17.2x. Though the upside may be limited in the near term, the long-term prospects
remain intact given the low corporate leverage levels, the better position of financial
institutions, and the revival of the investment cycle in India.