Nifty Gained 3% in 2022, but Outperformed Global Market; what’s next for 2023?

Dalal Street may continue to outperform Wall Street scale 21400 levels by Dec’23-Mar’24 assuming 931 EPS for FY23 and +20% CAGR for FY24 and an average PE of around 20

India’s benchmark stock index made a small gain of around +3.25% for 2022, outperforming all the major G20 peers in a 7th consecutive year of gains, but the least since 2018. India outperformed significantly its global peers despite global macro headwinds and lingering geopolitical tensions coupled with synchronized global tightening led by the Fed and globalization of sticky inflation. But eventually, Nifty EPS gained by around +15% on an annualized basis, whereas EPS contracted around -10.50% on an annualized basis (till September QTR) on an average.

India’s Nifty also gained around +48.85% in the last 3 years, while jumped +18.64% in 2022 and +34.75% in the last 3 years. Against this backdrop Wall Street’s slumped -9.40% in 2022, but gained +15.76% over 3 years; -33.89% and +16.03%; S&P 500: -19.95% and +18.69%; : -11.50% and +1.59%; China A50: -17.44% and -10.16%; : +0.91% and -2.24%; : -15.01% and -30.47%

India’s RBI also followed Fed and goes for a +225 bps hike in the repo rate to bring down core inflation in India, elevated around +6.00%, substantially above RBI’s target of +4.00% and also at the upper tolerance band (2.00-4.00-6.00%). But RBI’s strategy to follow Fed resulted in INR stability and also restored RBI’s credibility in prioritizing inflation management while keeping economic growth momentum in line.

As a result, FPIs returned from around mid-year, and coupled with that robust corporate earnings growth, largely stable macros, and resilient domestic demand, FPIs turned net buyers. Also, India’s political and policy stability helped despite global turbulence. India is now being seen as a ‘bright spot’ in a gloomy global macro cloud. As a stable and world’s largest democracy, India now matters more to the rest of the world than a few years ago. Thus India is now able to keep good geopolitical relations with two major superpowers (U.S.-Russia) at the opposite end of the spectrum, keeping its own economic and other interests intact (under the strong leadership of PM Modi). India is also able to keep good business/diplomatic relationships with other major European countries, Australia and Japan even after buying Russian/Iranian oil extensively at a favorable rate.

Although there were some minor skirmishes with China at LAC recently (after a joint military exercise with the U.S. in the Ladakh area, close to LAC with China), there is no concern about a major flare-up. India-China occasional geopolitical skirmishes at disputed LAC area may be now a part of domestic political compulsion by both sides amid the forthcoming general election in India (2024) and Chinese COVID spikes/economic slowdown. Such LAC skirmishes may be useful sometimes by political leaders to divert public/media attention from core issues.

In any way, India is now a vibrant economy and angel investors are keen to invest in the appeal of 5D (demand, demography, development, democracy, and digitalization) and Modinomics (reform and performance). India’s Nifty made a new high around 18887.60 in early December before making a low of 15183.40 in June (after Russia launched the Ukraine invasion and Fed/RBI goes for a rapid tightening mode to bring sticky inflation down). Nifty jumped almost +25% from June low to December high and closed the year around 5% down from the top.

Indian manufacturers and tech/IT service providers took advantage of structural changes in global supply chains and uncertainty in Asia as China continued to suffer from COVID-induced lockdowns and Europe continue to buy refined products from Indian companies amid Russian supply restrictions. The Indian economy is growing around +7% (y/y) despite higher borrowing costs (interest rates) and elevated inflation as India is primarily a domestic consumption economy with little external debt/vulnerability.

Also, India is providing significant targeted fiscal stimulus in different forms and huge Capex to support economic growth and employment despite higher inflation. The Indian government is also taking some corrective steps to improve supply and bring down inflation. Unlike Europe, India is not dependent on imported food. The banking/financial system is now robust and banks are lending prudently even with +18% advance growths; banks are now writing-back NPAs from past write-offs; i.e. recovering past bad loans. Most of the major Indian corporates are also reporting +20% annual growths in core operating EPS amid robust demand and deleveraging.

Indian consumer spending is also resilient despite the higher cost of living because almost 30% of the Indian population, equivalent to the entire U.S. population has stable jobs/income (government and reputed corporate employees), and has adequate real wage growths regularly. Many Indian super riches are now growing rapidly, thanks to the vibrant stock and real estate market, though income inequalities are also growing.

Also, despite DEMO in 2016, the flow of black money in the Indian economy is still robust due to rampant corruption at almost all levels, especially in various infra projects (cut money) and even certain state levels of government employment. Thus, despite higher inflation, higher borrowing costs, and higher cost of living, Indian consumer spending is still robust. And the Indian economy/society is now also running normally (without any COVID masks) as the country was able to turn the pandemic into an endemic successfully in late 2021 by achieving dual herd immunity (natural infections and artificial vaccinations).

In brief, India is now being seen as an island of stability in a turbulent ocean despite higher USDINR and higher oil. Higher USD is good for Nifty EPS as almost 60% of Nifty revenue comes from exports. If we consider Indian service export, robust remittances, and stable FDI inflows, relatively Indian CAD (current account deficit) servicing is quite manageable; no need for any undue concern/panic.

The current sequential run rate of Nifty EPS (consolidated) growths is around 3.75%; i.e. annualized +15.00%. As per the current sequential run rate, FY23 EPS may come to around 931, and assuming +20% CAGR for FY: 24-26, the consolidated Nifty EPS may print around 1070-1284-1541. And assuming a median/average PE of 20, the average fair value of Nifty may be around 18600-21400-25700-30825 for FY: 23-26.

As the financial/stock market generally acts on expectations or discounts 1Y projected/forward EPS in advance, Nifty may scale around 21400-25700-30825 by Dec’23/Mar’24, Dec’24/Mar’25 and Dec’26/Mar’27. Further, if Fed/RBI indicates rate hike pauses after March/June’23 and Russia-Ukraine/NATO geopolitical tensions do not worsen further leading to WW-III (nuclear war) situation, then Nifty may scale around 20150-450 by Mar’23.

In Q4FY23/FY24, Nifty earnings may be boosted by higher commodity prices amid China reopening. Although a higher interest rate regime (bond yield curve steepening) is positive for banks & financials and negative for non-financials corporates to some extent, there may be also elevated retail NPA as most of the loans including mortgages are on a floating interest rate basis. And most of the big Indian corporates are now largely deleveraged or have sufficient positive cash flow to service loans. In any way, both Fed and RBI may go for rate cuts in early 2024 if there are signs that inflation is steadily easing towards targets, Dalal Street and Wall Street will also flare up ahead of the respective general election on the expectations of lower borrowing costs.

In 2022, the Indian stock market was boosted by PSU and private banks, surging around +69% and 19% on higher NIM, lower NPA/stable asset quality. PSU banks also jumped from a lower pre-COVID base by around +73% over the last 3 years. Dalal Street has also boosted metals (+21.60%), FMCG (+17.74%), energy (+14.16%), automobiles (+13.94%), and infra (+5.58%). On the other side, the Indian market was dragged by techs/IT service exporters (-27.03%), pharma (-11.44%), media (-11.35%), and reality (-11.32%).

In 2022, Techs were under the stress of the concern of a looming recession on both sides of the Atlantic and possible lower tech spending. Also, the sentiment of techs and pharma was affected as the global pandemic largely turned into an endemic (except in China). Media stocks were affected as the world turned into OTT/digital from television and print. Interest-sensitive real estate stocks were under pressure on higher borrowing costs.

If we consider a 3-year time frame, then metals boosted most (+140.27%), followed by Techs/IT (+79.13%), PSU banks (+72.73%), energy (+62.47%), infra (+60.58%), automobiles (+55.04%), pharma (+54.55%), FMCG (+47.05%), realty (+44.90%), private banks (+24.20%) and media (+13.36%). Nifty gained around +48% in the last 3 years (pre-COVID, since Jan’20).

In 2022, Nifty was boosted by Adani Enterprise (+124.21%), M&M (NS:) (+52.77%), ITC (+51.83%), Coal India (NS:) (+45.75%), Axis Bank (NS:) (+34.76%), Indusind Bank (+33.29%), NTPC (NS:) (+33.13%), SBI (NS:) (30.40%), Britania (+19.50%), Eicher Motors (NS:) (+18.26%), ICICI Bank (NS:) (+18.22%), Bharti Airtel (NS:) (+17.91%), Sun Pharma (NS:) (+17.73%), JSW Steel (NS:) (+16.24%) and Cipla (NS:) (+14.78%).

In 2022, Nifty was dragged by Wipro (NS:) (-45.56%), Tech Mahindra (NS:) (-41.62%), Divi’s Labs (-27.17%), HCL Tech (NS:) (-21.90%), Tata Motors (NS:) (-20.85%; Chinese/European slowdown), Infy (-20.25%), TCS (NS:) (-14.86%), BPCL (14.05%), DRL (-12.92%), HDFC Life (-12.74%), Asian Paints (NS:) (-11.20%; higher crude oil price), Apollo Hospitals (NS:) (-9.95%), Bajaj Finance (NS:) (-9.43%), Ultra Tech Cement (-9.26%) and Bajaj Finserv (NS:) (-9.08%).

For a 3-year time-frame, Adani Enterprises (NS:) jumped the most (+1748.30%), followed by Apollo Hospitals (+202.41%), followed by JSW Steel (+184.60%), Tata Steel (NS:) (+144.06%), Tata Consumer Products (NS:) (+140.60%), M&M (+137.95%), Grasim (NS:) (+130.75%), Titan (NS:) (+127.33%), Cipla (+127.56%), Sun Pharma (+124.80%), Hindalco (NS:) (+124.51%), Adani Ports & SEZ (+115.29%), Tata Motors (+106.10%), Infy (+102.96%), Divi’s Labs (+84.63%) and SBI (+83.97%). Nifty was dragged most by BPCL (-26.08%; lingering disinvestment fiasco), Indusind Bank (-20.46%), and HDFC Life (-10.00%).

India’s 10Y bond yield jumped +13.78% in 2022, and +12.90% in the last 3 years, closing around +7.35%. jumped +11.10% in 2022 and +15.13% in the last 3 years, closing around 82.60. Looking ahead, USDINR may further surge around 86.00-90.00 by Dec’23 if technically sustain over 83.50 and fundamentally if there is some divergence between Fed and RBI monetary tightening including QT. Also, India’s macros including CAD and fiscal deficit may matter along with the forthcoming early 2024 general election. Normally USDINR appreciates ahead of any general election, favorable for unofficial election spending by various political parties. Higher USDINR is also positive for Nifty warnings as almost 60% of revenue comes from export. Also, RBI/government wants an orderly appreciation of USDINR in line with the , which is positive for India’s export growth (despite the domestic economy, inflation, and political issues).

Now from local to global, stocks on both sides of the Atlantic (U.S.-Europe) closed 2022 at worst since 2008 amid an ongoing stagflation-like scenario and the concern of an all-out recession next year amid synchronized global tightening (higher borrowing costs), sticky core inflation, elevated geopolitical tensions (Russia-Ukraine)/economic sanctions and fragile economic growths.

For 2022, Dow Jones (DJ-30) tumbled almost -9.40%, S&P 500 tumbled around -18.95%, while Nasdaq 100 plunged almost -33.89% amid higher USD, US bond yields, and subdued Chinese demand/supply chain disruption (ZERO COVID policy). In 2022, sequential S&P 500 QTR EPS growth is contracting by around -2.65% on average, which may lead to -7.5% and -5.5% contraction in 2022 and 2023.

In Europe, Stoxx 600 plunged almost -13% in 2022, the biggest annual drop since 2008 GFC days as Europe is the biggest victim of the Russia-Ukraine/NATO war/proxy war and elevated imported fuel & food costs amid depreciated EUR. Italy (TSX) plunged -15%, France (CAC-40) slid -9.5%, Germany (DAX 40) tumbled around -12.59%, while the U.K. (export savvy FTSE 100) outperformed the rest as it gained just around +1% for 2022 amid weaker GBP and higher commodity prices.

Japan’s lost around -11.35% in 2022, 1st annual loss since 2018. Export-heavy Japan is also a major victim of fragile global trade amid lingering geopolitical tensions over Russia-Ukraine and the Chinese slowdown (ZERO COVID policy). Although JPY slumped -15% this year, synchronized global tightening/stagflation has affected Japanese export, while domestic demand is still fragile amid an environment of a deflationary mindset. And lastly, the BOJ shocker/bazooka of YCC band widening also affected export-savvy Nikkei 225 as JPY bounced back.

Meanwhile, export-heavy China’s Shanghai Composite slumped -15% while the Shenzhen Component tumbled -25% in 2022, with both benchmarks set to post their first annual losses since 2018 amid ZERO COVID policy, property sector woes, synchronized global stagflation, and policy flip flops. But China may be also able to turn the pandemic into an endemic by H1CY23, which will boost not only the Chinese stock market but also the U.S./Europe and the rest of the major economies. As the world’s 2nd largest economy, restoration of Chinese supply and demand is vital for the global economy, and China, currently at around $17T economy, may also surpass the U.S. economy (currently around $20T) by 2030, if the country is back on a normal growth path in the coming years.

Looking ahead, whatever may be the narrative, technically Nifty Future now has to sustain over 17900 for a rally towards 18225/18275-18335/18450-18515/18555 and further 18950/19025 in the coming days; otherwise sustaining below 17850-800, Nifty Future may further fall to 17680/17500-17350/17250 and 17075/16640 in the coming days depending upon Fed/RBI action, Q3FY23 report card, overall macros and FY23 budget/nature of the fiscal stimulus ahead of G20 and early 2024 general election. India is now a major beneficiary of political/policy stability and the appeal of 5D (development, demand, demography, deregulation, and digitalization). There may be also some income tax-related fiscal stimulus (hike of minimum tax bracket to Rs.5L from present 2.5L and rejigs of other slabs), which may boost discretionary consumer spending to some extent.