Market Outlook: May 2023

Date: 12 May, 2023

April month ended in mixed bag for global indices where US S&P 500 grew 1%, Nasdaq was flat whereas Japan’s Nikkei was up by 3% and on Asian continent side, China was down by -4% whereas India and Russia were up by 4% and 8% respectively.

First Republic Bank in the United States recently raised the alarm in the wake of the shockwaves caused by the bank failures of SVB and Signature Bank (both in the United States) and Credit Suisse Bank (Switzerland). It has now been acquired by JP Morgan Chase through a deal that was mediated. JP Morgan Chase will take over US$ 173 billion in loans, US$ 30 billion in securities, and US$ 92 billion in deposits. As a result, the feared contagion effect of a bank failure was avoided, resulting in a relief rally in major US financials. Since the troubled banks have been taken over without significantly harming depositors, we believe that the risks posed by the US banking system have largely diminished. On the other hand, continued rate hikes by Fed are showing mixed impact on real economy.

GDP growth (QoQ) data from the Eurozone indicate that the region has narrowly avoided recession, posting 0.1% growth in Q1CY23 compared to the previous year: 0.2%, up from 0% in Q4CY22. In Q1CY23, China's GDP grew by 4.5 percent (estimated: 4%), up from 3% development accomplished in CY22.

When it comes to Asia, China and Japan both continue to employ loose monetary policies. In its policy decision from April 23, the BoJ reaffirmed its ultra-loose monetary policy and did not alter its Yield Curve Control (YCC) strategy.

World Indices % Performance in April 2023

1- Source: IDBI Capital, Bloomberg

In its recent report, the International Monetary Fund (IMF) announced risks for the global economic recovery. As the effects of the sharp tightening of monetary policy and signs of stress in the global banking sector are known, growth forecasts for major economies have been cut. The baseline forecast sees growth slowing from 3.4 percent in 2022 to 2.8 percent in 2023, before falling to 3.0 percent in 2024. Growth in advanced economies is expected to slow particularly sharply from 2.7 percent in 2022 to 1.3 percent in 2022. India. Growth is projected at 5.9% for FY24, significantly lower than RBI's forecast of 6.5%.

Domestically, the Indian stock market rose 4% on April 23, outperforming most global stock indices. Interestingly, positive sentiment was broad based in the Indian equity market, as evidenced by strong gains in the mid-cap (6%) and small-cap (8%) indices. Earnings season has begun and so far there have been no major negative surprises. Of the 22 companies reported on the Nifty, it mostly showed a flat top line but margins rebounded from the previous quarter. Financial numbers showed strong sequential numbers, but the outlook for FY24 is muted. RBI surprised the market with a pause while FPI flows and global scenario added positive momentum. Today's valuations look reasonable compared to a few quarters ago.

We expect flows to remain moderate for short term as there are no signs of rate cut. Moment interest rates start declining, flows in derivative market is expected to get stronger in coming quarters as risk aversion to high interest rates fades away.

Key macro indicators released during the month were:

• Core sector growth moderated to 3.6% on YoY basis in Mar’23 as against 7.2% in Feb’23. Major deceleration in growth was observed for sectors such as cement and electricity.
• CPI inflation eased to its lowest since Dec’22 to 5.7% in Mar’23 compared to 6.4% in Feb’23
• Core CPI (excl. food and fuel) came down to 5.8% in Mar’23 from 6.1% in Feb’23.

To summarize, we do see some visible cracks in domestic consumption in near term quarters especially on rural side. The mass segments seem to still struggle from aftermath of Covid effects & high inflation. We remain cognizant that one must remain selective in terms of stock/sector selection while doing bottoms up strategy. We see large caps showing relatively lesser comfort on valuations vs mid/small caps hence new opportunities will be easy to spot in latter space.

the Indian stock market saw a roller-coaster ride in the financial year ending March 2023, amid strong monetary policy stances by global central banks, outflows of outside capital, soaring inflation, and the Russia-Ukraine war. Despite the fact that FIIs sold $5.7 billion in shares, DIIs backed with a net purchase of $31 billion. We feel that the current 10% pullback in the Nifty from its all-time highs has provided an excellent chance for investors to accumulate equities for the long term at reasonable prices.