Sandip Sabharwal - Uncategorized - MARKET OUTLOOK SEPTEMBER 2022

There is only one way to describe the resilience of the Indian Stock Markets. Its Extraordinary. After the strong rally of last month we saw a follow up with the Nifty again climbing by another 3.5% and Midcaps outperforming with a rally of 6.2%. This was despite little respite on the macro concerns plaguing the markets this year. After this move the Indian Markets are up by around 3% for for 2022 while most global markets are down 12-15% if not more.

On the macro front the key development of this month was the reiteration of most central bankers that inflation is the priority at this stage and the fight against inflation will go on for longer. This essentially implies that rates will remain higher for longer.  This is very important from an equity valuation as well as growth outlook perspective. Equity valuations are directly linked to risk free rates as well as economic growth prospects. RBI also increased rates this month at the upper end of the expected range. Stock Markets in general have been sanguine about these development at a time of stick inflation. The other big factor that is going to play out is the reversal of the huge money printing cycle with US Fed Balance Sheet reduction likely to pick up pace from September onwards. We have not seen monetary tightening with significant liquidity withdrawal in the past and need to see how markets will take it.

Overall the Indian Economy is much better placed in terms of both inflationary dynamics, growth prospects as well as the external front than pervious cycles and this should help us sustain premium valuations. However a 90% premium over other Emerging Markets is tough to sustain and that could become a challenge especially after the moves of the last two months.

Given that India did not have any significant fiscal stimulus the inflationary spiral has been lower than in other countries as unemployment still remains high and wage pressures ex of the IT industry are low. However global commodity inflation always seeps in and as a result we have seen sharp hikes in most product prices as well as food items. Wheat and Rice the two staple foods are up nearly 20% over the last year and milk prices are up over 10%. This has had an impact on consumption with most consumer items seeing pressures. Another positive for India has been the escape from the havoc of the global weather pattern changes (atleast for this year) and also the fact that we are able to procure crude oil at lower prices from Russia while Europe has borne the worst of both these factors. Higher farm prices means that farmers have got good cash flows this time as they have been able to sell cash crops in the market instead of to the government and at much higher than minimum prices.

The results season ended with there being an overall downgrade of earnings by around 4% at the end of the quarter led by Technology and commodities while financials, capital goods etc outperformed

The results season has been very well taken by the markets despite an overall weak season for most large companies. Technology stocks which have mostly reported saw significant margin pressures and underperformance of earnings expectations. Margins of many consumer companies were under pressure, banks in general outperformed expectations in terms of asset quality and growth which led to the banks outperforming the markets this month. Reopening trade companies like restaurants, multiplexes etc reported good numbers while cement companies saw margin pressures. Commodity companies saw severe profit pressures while automobile companies had a mixed bag with outlook improving. Infrastructure and Capital good companies reported good results and order bookings

One good part is that ex of crude oil all other commodities seem to be clearly topping out and some have also seen deep corrections driven both by slowing economy concerns as well as central bank actions.

The sectors to avoid for the next 6-12 months seem to be commodity and technology where lower global demand combined with extreme pressures on the Chinese Economy will keep commodities subdued and an imminent recession in the USA and Europe will impact technology demand and as such the growth of Indian Technology companies. Loss making new generation companies could also see things tightening as raising money at higher and higher valuations might be tougher.

Capital Goods, infrastructure and domestic cyclical industries should do better in this time period and still are underowned by investors and offer opportunities.

Automobile companies benefit due to this, they had been suffering over the last two years due to continuously increasing input costs, chip shortages and various shutdowns related to the pandemic. All of this seems to be getting behind now. The small negative is the impact of higher interest rates on demand which will need to be tracked. However overall stocks are underowned and hold potential.

Capital Good companies that have strong orderbooks and operate on a fixed price basis have suffered similarly. The investment cycle has started now and should last atleast three years. Here again input costs coming down will boost margins significantly. There are some companies focussed on railways businesses which could do very well

Reopening trades like Hotels, eating out, multiplexes have everything going for them now. People might be cutting down on other expenses but not on these. I believe these stocks will do very well over 2-3 years.

The best thing for equity markets will be that central banks gain credibility in their inflation fight and inflation peaks out and starts moving down. That will provide better opportunities to invest.

Indian Markets also trade at nearly 125% of GDP largely due to rapid gains in loss making company valuations or those with very low earnings.  Valuations are 20% above long term valuations.

From current levels of 17700 it is tough to build a case for an overall market upmove. However stability and lower volatility will give lot of opportunities in the right sectors.