Market expectations

Global factors may drive markets in the new Samvat

The Nifty and the Sensex have gained 9.5 per cent since last Diwali, which is a reasonable return in uncertain circumstances. Smaller indices have done better. The NSE500 is up by over 12 per cent and the Smallcap index 40 per cent. India continues to be the fastest-growing large economy. This is hardly cause for celebration, however, because a combination of weak growth, high inflation, and geopolitical stress has affected growth across the globe. The Ukraine war continues and the renewed conflict between Israel and Hamas has led to fears of energy-supply disruption. The resulting spike in crude oil and gas prices has added to inflationary pressures and can increase the trade deficit.

While the US, EU, and UK are suffering from a combination of low growth and high inflation, China is dealing with deflationary pressures, with its vastly indebted real estate sector enduring stress. Unfortunately, poor global growth means exports will remain subdued. Cautious advisories from the information technology sector, along with substantial workforce cuts, indicate there’s limited visibility of recovery in the near term. The rupee has dipped to record lows versus the US dollar. The US Federal Reserve maintains a hawkish stance and has signalled it may keep policy rates up for an extended period. This has led to sustained selling by foreign portfolio investors over the past three months, though equity investment inflows remain positive for 2023-24.

Domestic investors remain net buyers with institutions, mutual funds, and individual investors accumulating stocks. The primary market has also been vibrant, as a result, with 170 initial public offerings (IPOs) in calendar 2023 thus far. The list of outstanding draft red herring prospectuses indicates the IPO pipeline is robust. However, the startup ecosystem has suffered from a risk-off attitude since it is largely driven by hard-currency overseas funding. The Reserve Bank of India last raised policy rates in February but it continues to maintain tight money supply to contain inflation. Employment conditions, coupled with an erratic monsoon and high inflation expectations, have meant muted consumption across the semi-rural and rural hinterland.

Corporate results signal consumption is still K-shaped and urban-oriented. But majors in the two-wheeler and fast-moving consumer goods (FMCG) industries believe consumption may finally be picking up in the festival season. Sectoral outperformers in the past 12 months include automobiles and FMCG, and public-sector banks, which are all driven by optimism about consumption rebounds. Listed realty stocks have also done well and may again be reflecting upper middle-class urban demand. Infrastructure stocks have been driven by defence and construction-related government expenditure. Power consumption has hit record levels and, even allowing for weather-related vagaries, this is a sign of activity ramping up. Capital goods manufacturers have strong order books, and that indicates a rebound in private sector capex.

The ongoing elections and related political spending could boost consumption. But a fair number of smart investors will wait on the sidelines until such time as the shape of the next government at the Centre is known. The political equation guarantees stock-market volatility until mid-May 2024. However, bigger drivers for markets in Samvat 2080 could be global factors, such as global growth, the peaking of and a possible reversal of the interest rate cycle in advanced economies, and geopolitics. An escalation in West Asia could lead to significant volatility in all asset classes.