Russia’s military operation in Ukraine has shaken global markets, and our markets have fallen like there’s no tomorrow. Having traded the uncertainty and uneven nature of a post-COVID economic recovery, global markets now find themselves faced with multiple factors. Crude rose sharply. March could bring the “lift off” that everyone expects from the Fed. Minutes from his meeting suggest he may even be open to tightening monetary policy sooner than expected if US inflation does not ease. However, most of these factors are known to the markets.
Locally, since the start of the year, foreign investors have pulled over Rs 53,000 crore out of shares in India (it’s not even two months yet). It should also be noted that the national currency has struggled to absorb these flows and national institutions have so far bought about 40,750 crore rupees from the markets.
If 2020 meant secondary market gains, 2021 was a big bang primary market.
Initial public offerings (IPOs) were the flavor of the season, valuations were generally stratospheric and there was a virtual rush for subscriptions. The Paytm listing and a sour run for some giant IPOs may have been the disastrous beginning of the end for overpriced IPOs. Even the best performing companies in the broader markets and indexes were not spared this time around as overseas investors went on a selling spree. Profits were highest here and therefore significant cuts.
On the positive side, the earnings cycle is on an upward trajectory. The market is a slave to earnings. India’s Q3 earnings season went well, with most leaders moving toward improving demand and easing supply-side constraints. Raw material and crude prices have increased and impacted margins, but most of these companies have increased their prices. IT companies, although most of them provided good figures, as well as advice, suffered a deep correction. The same has happened for some of the companies in other growth-oriented sectors like pathology laboratories, food and specialty chemicals, automation and capital goods. The takeaways from most banks have been an impending recovery in credit growth, NPA issues being sorted out, and comments regarding the recovery in lending, demand and capital spending.
It looks like markets would find stability around the 16,000-15,500 levels. These are not technical support levels I am referring to, but rather valuation support levels. If we look at the consensus EPS of around 1000 for Nifty for FY24, we can probably estimate that Nifty is in a PE band of 15-20 depending on the strength of the economy, the earnings cycle, the sentiment and liquidity. However, this does not mean that these levels are sacrosanct in the short term. Markets can create excesses on both sides, as we have seen over several cycles.
Now on Indian macros we have never been so good on almost all fronts. I can go on and on, but I will limit myself to key figures such as foreign exchange reserves at $630 billion, rising direct tax and GST collections, rising IT exports, etc.
The currency has remained stable through the turmoil. Political stability, reforms, infrastructure spending announced in the Union budget, private sector in capex mode, financialization of savings, formalization of the economy are positive points to focus on while volatility takes center stage from the scene.
India, with its strong growth prospects, will receive its share of inflows from foreign investors whenever new allocations are made.
It is highly likely that in an environment of higher commodity prices, higher inflation, a move towards higher interest rates, market leaders in the large and mid cap space, who have excellent corporate governance, visible brand image, high ROE and ROCE, characteristic oligopolistic pricing power, high market share, low or no debt will continue to do well. You have to buy or accumulate quality companies on the dips.
While wealth creation is the ultimate goal, wealth preservation is just as important in the meantime. The portfolio needs to be balanced on both fronts, namely India’s strengths (consumer, IT, healthcare, agro, specialty chemicals) as well as economic recovery indicators (construction materials, retail, companies, some NBFCs, capital goods).
Buying in increments will ensure that one takes advantage of the volatility rather than running away from it. It is also imperative to realign and restructure portfolios in an effort to reduce unwanted activity and unpleasant memories. The idea is to generate long-term stress-adjusted returns with a good night’s sleep.
Those who try to skip the bad years also miss the good years. Being in the game is the most important.
(The author is Head – Equity Advisory, Centrum Wealth.)