Domestic equities have been experiencing the heat of global turmoil this year so far. Equity benchmarks the Nifty is down over 6 percent while the Sensex has lost over 5 percent year-to-date (YTD).
Fresh concerns, such as the Adani-Hindenburg saga and banking crisis in the West, have been adding to the miseries of investors while the lingering ones, including sticky inflation and a series of rate hikes, refuse to fade away.
The short-term outlook for the market is hazy. The market is witnessing a correction and it seems expecting gains in the short term is futile.
Some analysts even go to the extent of saying that retail investors should stay away from this market for some time.
"For the time being, it is advisable to refrain from trading and wait until the market stabilises. This is particularly important for short-term traders who may be more sensitive to market volatility," said Sunil Jain, Head of Equity Research - Retail at Nirmal Bang.
Global turmoil and the Indian market
Global cues, especially the US markets, have always been a significant factor for the Indian market. Fears of recession, Fed rate hikes and now the banking crisis have been the drivers of the Indian market lately.
However, it is not the global factors alone. The domestic factors too have contributed to the fall in Indian equities.
Signs of slowing demand, contracting corporate earnings, concerns over economic growth and inflation have been the major reasons behind the market's underperformance.
In fact, some market observers think the current banking crisis and the Adani episode were not major events for the market. They say the market is down because investors are concerned about the health of the domestic economy.
"The Adani Group or SVB was not the reason why the Indian markets have been somnolent in the last two or three months’ time. The reasons are more internal. The reasons are that there is a slowdown in the economy based on the GDP numbers that we have seen," market veteran Shankar Sharma said in an interview with ET Now.
G. Chokkalingam, Founder & Head of Research of Equinomics Research & Advisory Private Ltd, also believes global factors will not cause a major knee-jerk reaction in the Indian market.
"The fear in the domestic market has increased due to the fall of some banks in the US. We take a firm stand that the domestic market will not fall further badly due to global cues. Post three major events such as the Lehman crisis, early 2016 Global Deflationary conditions and the 2020 Covid pandemic, the Indian equity markets bounced back to a record level and beat most major markets in the world," said Chokkalingam.
In some cases, global pain has turned out to be a gain for the domestic market.
"One common factor in three cases was a crash in crude oil prices, which ultimately outweighed all adverse consequences. Crash in oil prices always benefits India in multiple ways –improves the current account balance, the balance of payments, forex reserves, the rupee exchange rate and also fiscal balance (by reducing the subsidy bill) ultimately. It also moderates inflation. Thus, global pain is always proven to have some gains for India ultimately," said Chokkalingam.
The domestic factors
Indian economy still looks better placed than the rest of the world thanks to its domestic-centric nature.
As Mint reported, quoting the finance ministry, the Indian economy is expected to grow at 7 percent in FY23 despite global headwinds while retail inflation would moderate in line with wholesale inflation which fell to a 25-month low in January.
The Reserve Bank of India (RBI) Governor Shaktikanta Das on March 17 said that India's financial sector remains stable amid the banking crisis in the US and Europe. Das also emphasized the resilience of the Indian economy which is expected to be the fastest-growing economy in the world.
However, there are some concerns over inflation which may rise if El Nino turns out to be stronger. There are chances of an El Nino developing in the second half of 2023. El Nino can cause poor monsoons. Historically, there have been several droughts in the country in El Nino years.
As per the monthly economic review report for February 2023 by the Department of Economic Affairs, inflation will moderate in FY24 compared to FY23 and is likely to remain in the range of 5-6 percent, with risks evenly balanced.
“Going forward, the inflation trajectory will likely be determined by extreme weather conditions like heatwaves and the possibility of an El Nino year, volatility in international commodity prices and pass-through of input costs to output prices," Mint quoted the report saying so.
Take a bet on the India story
India remains an attractive market for long-term investors due to its economic resilience and this could be an opportune time to buy quality stocks as the market is in a corrective phase and the valuation has come down.
As Chokkalingam highlighted, the valuation of the domestic market has become quite attractive as Nifty’s one-year forward PE is down to 17.3 times, which is a 10-year average level. In March 2020, Nifty hit the 10-year average and bounced back substantially. This time also, Chokkalingam expects a solid recovery in the overall market PE.
Besides, the government and the RBI are taking measures to ensure that economic growth remains on track in the fight against inflation.
"Despite these challenges, the Indian government is providing good support to the economy, and the country is performing well on other parameters. It is quite possible that the Nifty may continue to move upwards at a rate of around 14 percent to 15 percent CAGR for the next two to three years," said Jain of Nirmal Bang.
Brokerage firm Phillip Capital advises investors should use correction in the market to build a strong portfolio for the long term as India's long-term growth prospects remain intact.
The brokerage firm has a Nifty target of 18,500-19,500 for March-September 2024.
The brokerage firm said supportive government policies and the long-term potential of the Indian economy will continue to augur well for capital formation, but other GDP components like consumption and exports may weaken in FY24.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.