By Roop Bhootra
The Indian equity markets and corporate sector have shown a tremendous recovery in the just concluded financial year and have successfully staged a recovery from the Covid induced lockdowns and restrictions. The growth was both led by increase in volumes and value as the economy gradually unlocked during the year. The resilience and swiftness shown by most corporations in terms of recouping lost businesses and scaling up into new areas was also well rewarded by the markets which is what we saw in the overall performance during the year.
In the present, the war between Russia and Ukraine continues with no definite indication of an end. Supply chain disruption due to the war and embargo imposed by many countries against Russia have pushed up global commodity prices. This has created concern for the already alarming global inflationary situation especially in the US and Europe. Major central banks have started increasing policy interest rates. At the same time, the growth indicators suggest loss of momentum.
India too is impacted by the adverse global developments. Particularly, high crude oil prices increase India’s import bill and have a negative impact on growth and exerts inflationary pressures. If such price rises are not fully transmitted to domestic prices, government finances deteriorate. Raw material to sales ratio for Indian non-financial companies is around 50%. With the sharp rise in global commodity prices, this ratio has gone up considerably resulting in margin pressure. India is facing some domestic challenges too. Subdued rural income, sluggish demand for consumer durables including automobiles, low consumer confidence, and slow recovery in passenger transportation and hospitality industry are some of the problems being faced by the country.
Despite these factors, India remained the fastest growing major economy of the world during 2021. And according to the estimate of the International Monetary Fund, India will remain the fastest growing major economy of the world during 2022 as well as 2023. Despite some hardening, the increase in inflation level in India is far lower as compared to the US or Europe. Government finances are in much better shape versus most of the peers. The banking system remains stable with signs of modest acceleration in credit growth. With close to $650 billion foreign exchange reserves, India’s external sector also remains resilient. Reflecting India’s better macro and corporate fundamentals versus the peers, the Indian equity market remains one of the best performing globally over all investment horizons between one to 10 years.
Coming to the upcoming year, the initial period is likely to be eventful as ongoing Ukraine crisis and its related second order impact has left lot of challenges in terms of increased operating and material costs as already seen in quarterly results particularly due to higher oil and major commodity prices across the board, supply chain disruptions, alarming global inflationary situation especially in the US and Europe. We expect the majority of these challenges to subside by H2 of the current financial year.
To sum up, we do see some uncertainty in the global macroeconomic and financial market scenario. In the short term, these factors will impact India also. Yet, with superior macroeconomic and corporate fundamentals, increasing liquidity to the equity market from domestic investors, and equity valuation at reasonable levels suggest that the medium to long term prospects for the Indian equity market continues to remain attractive.
In terms of strategy, investors should focus on a mix of value and growth with a relatively higher component of value stocks. With recent decline in broader markets a lot of value has emerged in the markets with decent growth. One can focus on stocks in sectors like IT & Technology, Chemicals & Specialty chemicals, Manufacturing, Construction & Infrastructure, Banks, Metals. On index basis Nifty 50 is currently trading at about 20 times forward twelve months basis and at about 17.5X times a year next to that. We currently have a target of 18,900 for Nifty 50.
(Roop Bhootra, CEO, Investment Services, Anand Rathi Shares and Stock Brokers. Views expressed are the author’s own.)
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