Indian markets set to post worst Samvat show in 7 yrs; smallcaps outperform

Indian equity markets are set to post their worst performance in a Samvat in the past years (since Samvat 2071) with the frontline indices – the Nifty 50 and S&P BSE Sensex – declining around 2 per cent each. Earlier in Samvat 2071, the S&P BSE Sensex and Nifty 50 had dropped 4 per cent and 3 per cent, respectively.

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The fall in the broader markets – mainly the S&P BSE Midcap index – in Samvat 2078 has been sharper, with the index slipping around 3 per cent during this period. However, the S&P BSE Smallcap index has outperformed by gaining around 1 per cent, data show.

Analysts attribute the dismal performance in Samvat 2078 to a wide variety of new flow ranging from geopolitical issues, higher inflation (mainly food and energy) and hawkish action of central banks, especially the US Federal Reserve (US Fed). In this backdrop, they caution the worst may not be over for the markets in the near term. Any downside, they say, will be a good time to buy stocks of quality businesses from a long-term perspective.

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"The US Fed’s continued hawkish stance, rising USD versus GEM currencies, and the prospect of US and Eurozone recession, together with geopolitical uncertainties, paint a negative outlook for equities in the near term. While India may not be immune to such risk aversion, we see several positives too, and would view market volatility as a good buying opportunity in structurally winning businesses," wrote Herald van der Linde, Head of Equity Strategy for Asia Pacific at HSBC in a recent coauthored note with Amit Sachdeva and Anurag Dayal.

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Meanwhile, foreign portfolio investors (FPIs) offloaded nearly Rs 2 trillion ($265 billion) in Indian equities during Samvat 2078, data show. On the other hand, domestic institutional investors (DIIs) that include domestic mutual funds, insurance companies, banks, financial institutions, pension funds etc., put in Rs 3 trillion in equities during this period, data show.

Midcap radar

Of the S&P BSE 500 index, less than half or 207 scrips outperformed the index in Samvat 2078, of which 143 stocks gained over 10 per cent.  Public sector undertakings (PSUs) – mainly defence, Adani and Tata Group stocks led the pack.

Among the lot, Adani Power, Adani Total Gas and Adani Enterprises and two PSU defence companies – Bharat Dynamics and Mazagaon Dock Shipbuilders – have seen their market price more-than-double during Samvat 2078. ITC and Mahindra & Mahindra from the S&P BSE Sensex and Nifty 50 index have surged 53 per cent and 48 per cent, respectively.

Among sectors, power (up 38 per cent) gained the most, followed by capital goods (16 per cent), while fast moving consumer goods (FMCG) and automobiles, up 14 per cent each. However, realty stocks cracked with the index slipping 22 per cent, followed by IT (17 per cent), metal (9 per cent), healthcare (7 per cent) and consumer durable (5 per cent) indexes.

Analysts at Axis Securities believe that the relative outperformance of the Indian markets will sustain in Samvat 2079 and would be led by favourable macroeconomic factors and better-than-historical fundamentals of Indian corporates. While inflation continues to be a major challenge in the developed world, they believe inflation in the domestic economy is manageable. 

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“Banks, Domestic Industrials, FMCG, Auto, Hospitals, and Discretionary consumption have outperformed the cyclical + export-oriented themes since the June bottom. We believe this trend is likely to continue in the upcoming quarters," they wrote in a recent note.

Those at ICICI Securities expect India Inc to deliver earnings growth in excess of 15 per cent over the next two years given the current economic milieu and provide a plethora of investing opportunities in Indian markets.