Nifty rose for the 7th consecutive year in 2022; Will this dream run continue in 2023?

Despite the significant volatility brought on by rising recession fears, high commodity prices, and interest rate hikes, the Indian stock market performed well in 2022. The Nifty50 ended last year higher by 4.32%, or 751.25 points.

The index also registered a new lifetime high of 18,887 on December 01, 2022, after hitting its 52-week low of 15,183 points on June 17.

With a 4.32% gain in 2022, the Nifty set a new record by delivering consecutive positive returns over the past seven years (CY16–22), despite a slew of setbacks including Demonetization, GST, and Covid-19 along the way, said Motilal Oswal in its latest India Strategy report.

During the last seven years, Nifty delivered a CAGR of 14% over CY16–22. The last such rally was seen way back in CY02-07, when the benchmark rallied for six consecutive years, clocking a CAGR of 41%, it added. 

Even though the index has been up seven years in a row, there are only two sectors—Oil & Gas and Financials—that have delivered positive returns in all these seven years. 

On the stock-specific front, four stocks, including Reliance Industries, Bajaj Finance, Adani Enterprises, and JSW Steel, have outperformed the Nifty 50 in six out of seven years. 

On the other hand, Coal India has underperformed Nifty-50 in six out of seven years, while five stocks BPCL, Cipla, Dr Reddy’s Labs, ONGC, and Tata Motors have underperformed in five out of seven years, according to the brokerage. 

Within Nifty-50, Bajaj Finance and Asian Paints decline first time in CY22, after ten consecutive years of positive returns, it said. 

During the last seven years, FIIs have cumulatively invested $30.4 billion in the Indian markets, with only two years of outflows. With just one year of outflows since CY16, DIIs have invested USD 80.5 billion cumulatively, with USD 32.2 billion of investment in CY22 alone.

Further, the brokerage added that 50% of its coverage universe (ex-Nifty-50) clocked four to five years of positive returns.

"Only, three MOFSL Coverage stocks (Pidilite, Trent, and Vinati Organics) have delivered positive returns in all these seven years; Trent has outperformed the benchmark indices in all seven years, while Pidilite has outperformed in six out of seven years."

"Apart from the above three companies, four stocks within our coverage have outperformed the benchmark in six out of seven years; Varun Beverages outperformed in all the years since its listing," said the brokerage.

Does this dream run have a chance of continuing?

Markets in 2022 have been highly volatile and jittery, led by a multitude of global and domestic macro headwinds. However, despite these challenges, the Indian markets showed remarkable resilience and outperformed the global markets significantly, it stated. 

PSU Banks, Utilities, Metals, Private Banks, Consumer, Capital Goods, Automobiles, and Oil & Gas have led from the front while Technology, Healthcare, Telecom, Media, and Real Estate have lagged in CY22.

Going forward, the deceleration in the pace of inflation and any resolution in the Russia-Ukraine conflict will provide relief, thus allaying the pressure on central banks to raise rates further, Motilal Oswal pointed out. 

On the downside, the slowing economic growth may negatively affect demand and, consequently, company profits. Notably, over the last three years, a strong corporate earnings trend has been the most important driver of India’s outperformance, the brokerage highlighted.

Nifty Valuation 

Since the beginning of 2016, the Nifty 50's valuation has remained high. However, valuation dipped below its LPA (Long Period Average) during CY20, led by the pandemic.

Earnings uncertainty over the past two years has resulted in high volatility in valuations during the period. However, thanks to a strong economic recovery, stable corporate earnings, and domestic tailwinds, Indian markets recovered quickly and continue to outperform global markets, it says. 

Nifty’s 12-month forward P/E is trading at 18.9x compared to an LPA of 19.7x, and its 12-month forward P/B stood at 3x, at a premium of 12% to the Nifty’s historical average of 2.7x.

Further upside from hereon will be a function of stability in global and local macros and continued earnings delivery vs. expectations in the near term, as per the brokerage. 

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