From geopolitics to rate hikes, events that shaped the market performance in FY23

The Indian equity market finished the fiscal year 2022–2023 on a flat note amid a volatile and challenging environment. The year witnessed several significant events that impacted market sentiment and investor confidence, including geopolitical tensions, high interest rates, inflationary pressures, and global banking crises.

The stock prices across various sectors have fluctuated widely, leading to a roller coaster ride for investors. Against this backdrop, some small and mid-cap stocks, especially those in the hotel sector, banking and the defence sector, have made money for their investors.

The Russia-Ukraine conflict emerged as the most prominent event that influenced the Indian equity market and the global markets in FY23. The escalated tensions between these two nations led to an increase in global crude oil prices, thereby affecting the Indian economy, which is highly dependent on oil imports.

This led to a fall in the stock market indices, with investors taking a cautious stance on the country's economic prospects. In addition to the impact on crude oil, the war also resulted in a surge in various commodity prices such as coal, edible oil, gas, metal, and food prices.

As commodity prices have surged to multi-year highs, many companies have found themselves grappling with the challenge of managing rising input costs. Therefore, they were forced to pass on these higher costs to customers in the form of price hikes, even as demand for their products remained sluggish.

For context, the rise in coal prices led to an increase in the price of cement, and the shortage of coal affected India's power sector, while high oil prices resulted in increased prices for tyres, textiles, and paints.

Similarly, the rise in palm oil prices affected the margins of FMCG firms, which had to undertake price hikes multiple times during FY23. Further, automakers have also taken price hikes multiple times due to the rise in steel and other commodity prices; the construction industry has also been affected largely by the surge in building materials.

The Russia-Ukraine crisis also led to supply chain disruptions, which have led to a spike in food prices as Ukraine and Russia provide the majority of the world's major food supplies.

Rising food and fuel prices pushed inflation to unprecedented heights, and major developed economies experienced record-level inflation in FY23. Prior to the conflict, inflation was already on the rise due to slowdowns in the global supply chain as countries emerged from Covid lockdowns.

In a fight against inflation, central banks around the world were forced to raise interest rates to a level not seen since 2008. The United States Federal Reserve started lifting rates in March last year, and the European Central Bank and the Bank of England also followed suit.

The RBI increased the repo rate for the first time since 2018 in May of last year. In FY23, the Indian central bank raised the interest rate by 250 basis points (bps), pushing the repo rate to 6.5% from 4%.

As the Fed kept its rate hike engine hot, yields on US Treasury bonds surged, attracting investors who sought higher yields than they could find elsewhere in the world. This increased demand for dollar-denominated securities resulted in a surge in the value of the US dollar.

However, the rise of the US dollar has come at a cost to other currencies, many of which have hit all-time lows in value. Emerging market currencies, in particular, have been severely affected as investors flock to the safety of the US dollar amid global economic uncertainty.

The Indian rupee, for instance, has depreciated significantly against the US dollar, reaching an all-time low in October of FY23. In July 2022, the Euro, the official currency of 19 member countries of the eurozone, reached parity (1.0000) against the dollar for the first time in 20 years.

The weakening of currencies has not only increased the cost of imported goods but has also led to a depletion of foreign exchange reserves. Fortunately, India stood in a relatively better position, with adequate foreign exchange reserves, unlike some of its neighbouring countries, which had struggled as their reserves depleted quickly.

The increase in interest rates, intended to control rising prices, has made borrowings more expensive. This, in turn, has contributed to a slowdown in the global economy.

Tech startups were among the first to experience the impact of rising rates, as their funding sources dried up, leading to significant layoffs. This trend later extended to global tech giants such as Meta, Microsoft, Google, and Amazon, which also began laying off employees on a larger scale.

While the Indian market was dealing with extreme volatility due to high inflation and recession fears, it was struck by another storm, which exacerbated market sentiment.

On January 24, Hindenburg Research, a US-based short seller, released a report accusing Adani Group of accounting fraud, high levels of debt and more.

The report created a sense of unease among investors and raised serious concerns about the company's corporate governance practices. Adani Group denied any wrongdoing and rejected the accusations made in the report. The seven listed Adani Group stocks have wiped out about $125 billion in market value since January.

Amid all these uncertainties, the Indian stock market finished FY23 on a decent note, when compared to its global peers, which have fallen between 5 and 10%. The broader NSE Nifty has lost just 0.60% in the last fiscal year, while the S&P BSE Sensex has gained moderately by 0.72%.

Despite foreign portfolio investors (FPIs) being net sellers in FY23, the market outperformed its global counterparts, largely supported by domestic institutional investors and retail investors.

July emerged as the best month for the market, with both the Nifty 50 and Sensex giving 8.73% and 8.58% returns, respectively. This was due to a renewed interest in the Indian market by FPIs, who turned net buyers in July after nine months of relentless selling which began in October 2021.

Further, on December 01, BSE Sensex index rose 0.29% to hit a record high of 63,583. Similarly, the NSE Nifty marked a new all-time high of 18,887.

Nifty PSU Bank and Nifty FMCG indices outperformed in FY23

In FY23, the banking stocks emerged as clear winners. The Nifty PSU Bank index rose by approximately 991 points, moving from 2,725 to 3,716, gaining nearly 36.36%.

Banking stocks suffered hugely between April and June from the continuous selling by the FPIs. However, following the release of the June quarter results, investors turned bullish on the banking sector, and global brokerage firms also raised their bets on the sector.

After the RBI's rapid rate hikes, banks quickly raised lending rates but went slow on deposit rates, which resulted in higher net interest margins. Moreover, lower provisions also contributed to the profitability of the banks, which propelled stock prices to new highs.

In Q3 FY23, the 12 PSBs posted a robust profit growth of 65% YoY to ₹29,175 crore. Sequentially, the net profit rose by 13.58%. For the first quarter of the last fiscal year, public sector banks earned a cumulative profit of about ₹15,306 crore, registering a 9.2% growth annually.

While in the second quarter, the PSBs continued with the same magnitude and posted a 50% YoY jump in combined net profit at ₹25,685 crore.

For the first nine months of FY23, PSBs earned a cumulative profit of ₹70,166 crore as compared to ₹48,983 crore in the year-ago period, an increase of 43%.

Further, the Nifty FMCG index rose by 26.5% in FY23, followed by the Nifty CPSE and Nifty Auto index, which climbed by 16.2% and 16.03%, respectively.

Nifty Media & Nifty IT indices take a hit, become top laggards in FY23

The Nifty Media index and the Nifty IT index were the top laggards in FY23. Ever since analysts predicted a potential recession in the US, the UK, and the Eurozone, the value of IT stocks started beating down.

The US market accounts for 40–80% of revenues for Indian IT firms, with the big five—Tata Consultancy Services, Infosys, Wipro, HCL Technologies, and Tech Mahindra—accounting for more than half. Any slowdown in these economies will translate into fewer deals for Indian IT businesses.

Moreover, industry experts are concerned that the recent turmoil in the global financial system could result in a decrease in the number of new deals in the BFSI vertical.

The Nifty IT index fell to 29,698 from 36,343, losing nearly 21% of its value. The index has plummeted 24.71% from a record high of 39,446.70.

Mphasis was the worst performer in the Nifty IT index, with a fall of 49.1% in the last fiscal year. Wipro, L&T Technology Services, Tech Mahindra, and Infosys also fell in the range of 25–40% in the same period.

The Nifty Media index lost nearly 29% of its value, with TV-18 broadcast as the worst performer with a fall of 61.2%. This was followed by Nazara Technologies and Network 18 Media & Investments with a decline of 37% and 36%, respectively.

Seven stocks in the Nifty 500 have doubled investors' wealth

Mazagon Dock Shipbuilders, a defence PSU firm, emerged as the top gainer in the Nifty 500 index in FY23, with a staggering 177% return, surging from Rs. 239.70 to Rs. 663.05. This defence PSU stock began rising on February 24, the same day as the Russia-Ukraine crisis erupted, and it has since given 194% returns to its shareholders.

The Indian government's commitment to reducing the import of defence products and purchasing locally produced weapons and systems led to a strong bull run in defence PSU stocks.

Karur Vysya Bank was another top gainer in the Nifty 500 index. The stock climbed from ₹47.85 to ₹104.40 in FY23, generating a return of 118%. The other top gainers on the list were Varun Beverages, Finolex Cables, Rail Vikas Nigam, and Mahindra CIE, which doubled investors' wealth in FY23.

On the flip side, Brightcom Group, Piramal Enterprises, Tata Teleservices, Tanla Platforms, Gland Pharma, TV18 Broadcast, Adani Total Gas, Adani Transmission, Dhani Services, Intellect Design Arena, FSN E-Commerce Ventures, Adani Green Energy, HLE Glasscoat, Mastek, Greenpanel Industries, Polyplex Corporation, Indiabulls Real Estate, and Laurus Labs have lost investors' wealth by more than 50% in FY23.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.