Inflation, rate hikes play market party poopers in FY23; smallcaps hit hard

The small-caps were hit on the chin with the S&P BSE Small-cap index slipping nearly 7 per cent thus far during in FY23, underperforming the S&P BSE Midcap and the BSE 500 indexes

The runaway rally in Indian equities seen in fiscals 2020-21 (FY21) and FY22 came to a grinding halt in FY23, as most global central banks, including the Reserve Bank of India (RBI), tightened their monetary policies in order to fight galloping inflation.

As a result, the S&P BSE Sensex and the Nifty50 are set to end the current fiscal with a loss of 1.6 per cent and 2.7 per cent. In FY21 and FY22, the S&P BSE Sensex had rallied 18.3 per cent and 68 per cent respectively, data shows.

The small-caps, meanwhile, were hit on the chin with the S&P BSE Small-cap index slipping nearly 7 per cent thus far during in FY23, underperforming the S&P BSE Midcap and the BSE 500 indexes that moved down 2.3 per cent and 4.3 per cent, respectively during this period.

Foreign portfolio investors (FPIs) pulled out Rs 39,701 crore ($5.3 billion) from the Indian equity markets during this period, the National Securities Depository Limited (NSDL) data shows. The domestic mutual funds (DMFs), however, helped stem this fall and pumped in Rs 1.71 trillion in equities during FY23.

Among sectors, Information technology (IT), telecommunication, realty, metals, healthcare and pharmaceutical indexes have lost over 10 per cent thus far in FY23. Auto, capital goods, fast moving consumer goods (FMCG) and public sector undertakings (PSU), including banks, outperformed.
 

Over half, or 277, BSE500 stocks recorded negative returns in FY23. Including three Adani group companies – Adani Transmission, Adani Total Gas and Adani Green Energy, total 12 stocks saw their market price tank over 50 per cent thus far in FY23.  As many as 196 stocks recorded negative returns of over 10 per cent.

The road ahead

The recent correction in the Indian markets in the last few months, analysts said, have made valuations attractive and the downside from the current levels seems limited, at least for now.

Aniruddha Sarkar, chief investment officer at Quest Investment Advisors, for instance, believes the markets are pricing in most foreseeable negatives at the current levels and expects the frontline indices to give a high single-digit to low double-digit return in FY24. The two main triggers for the markets in FY24, according to him, are peaking out of the interest rate hike cycle in the US and India in the next six months, and a normal monsoon. A dip in the US and European economies, he cautioned, is a risk.

“I expect FY24 to be a better year for the markets as compared to FY23 as the valuations are more comfortable. Return expectations are quite low right now compared to when we entered the fiscal. The frontline indices are trading at 18x one-year forward earnings compared to the beginning of FY23, the downside risk appears limited, unless there is an unforeseen event,” he said.

Nitin Raheja, executive director at Julius Baer India, too believes that the market valuations are attractive and investors can buy and hold from a medium-to-long term perspective. Any major global geo-political and economic event, he cautioned, will, however, be a sentiment dampener.

“If one looks at the long-term historic PE at which markets have traded over the last 20 years, it is fair to assume that there is clearly a 17 – 18 per cent upside in the markets over the next 12-15 months. Earnings growth, attractive valuations and change in FPI flows from negative to positive over the next 12 months are some of the key triggers for an upside. A poor monsoon, high inflation and further rate hike are some of the key risks,” he said.