Indian stock market lags behind its global peers in 2023; Here are the key reasons

The Indian stock market, which had been a star performer in the previous year despite global economic headwinds, was lagging behind its global peers in 2023. The domestic benchmark indices, the Nifty and Sensex, have lost about 1.87% and 0.79%, respectively, so far this year.

In 2022, the Indian equity market performed well, with the Nifty50 and Sensex delivering a return of 4.32% and 4.44%, respectively, and also soaring to new heights, amply proving that it is far ahead of its global counterparts.

The markets in 2023 started the year well before facing challenges as the month went on. The underperformance has been attributed to a range of factors, including continuous FPI selling, the reopening of the Chinese economy, the sell-off in the Adani Group stocks, and the depreciation in the Indian rupee.

On January 25, the Nifty and Sensex tumbled 1.25% and 1.27%, respectively, a day after the Hindenburg released a research report alleging that Indian conglomerate Adani Group was involved in accounting fraud and raising new concerns about the group's debt and shareholding pattern of four listed companies in the group. It also flagged concerns about the group's high debt.

On the following day, the two benchmark indices each lost another 1.61% and 1.45% in value, taking the cumulative loss to 2.83% and 2.70% in just two trading sessions. The banking stocks took the most brunt on concerns over the debt exposure to the Adani Group companies.

However, global brokerage CLSA said in a report dated January 26 that the Indian banking system's exposure is less than 40% of total group debt. In response to Hindenburg allegations, the Adani group released a 413-page statement stating the report was driven by "an ulterior motive" to "create a false market" to allow the US firm to make financial gains.

The banking sector, which had been the driving force behind the index's growth in previous years, was now facing headwinds, causing the Nifty50 to underperform.

In addition to that, Nifty underperformed its major global counterparts. The two major US indices, the Dow Jones Industrial Average and the S&P 500, have increased by 2.21% and 6.96%, respectively, so far this year, while the tech-heavy Nasdaq rallied 12.8% during the same period.

The European major indices, the Dax, the CAC40, and the FTSE 100, have surged 8.80%, 8.12%, and 4.35%, respectively.

Adding to that, major Asian indices also delivered a better return year-to-date. The Nikkei 225 rallied 7.60%, the Topix also soared 6.36%, South Korea's Kospi added 10.97%, and the Kosdaq has climbed 15.31% in 2023 so far. 

China’s Shanghai Composite Index gained 4.63% after a slump of 15% in 2022, while Hong Kong’s Hang Seng index rose 5.19%.

Meanwhile, analysts were optimistic about the Indian economy, claiming that even if the major economies are headed for recession, the impact on the country will be modest due to its strong macroeconomic fundamentals.

FPI Sell-Off Spree Continues

According to the PTI report, foreign investors pulled out ₹28,852 crore from Indian equities in January, making it the worst outflow since June 2022, when they had pulled out ₹50,203 crore from equities. This came following a net investment of ₹11,119 crore in December and ₹36,238 crore in November.

Analysts are citing multiple reasons for the pullback, such as the expensive valuations of Indian shares over their global peers, the reallocation of funds to China and Taiwan for their relatively cheaper valuations, and Beijing's reopening, easing COVID-19 controls.

Foreign investors sold the most in financials, followed by oil and gas and consumer durables.

In CY22, FPIs sold Indian equities worth Rs. 1.21 lakh crore, the highest yearly outflow. Before this, the highest recorded outflow was in 2008, amid the global financial crisis, when foreign investors sold Indian equities worth ₹53,000 crore.

Rupee is under depreciation pressure

The Indian rupee started 2023 on a strong note, strengthening 1.60% in the first three weeks of January. However, it gave up its gains as the month progressed and ended January with a fall of 1.18% at 81.73 against the USD.

The Indian rupee ended 2022 as the worst-performing Asian currency with a fall of 11.3%, its biggest annual decline since 2013. The rupee finished the year at 82.72 to the U.S. currency, down from 74.33 at the end of 2021.

The domestic currency has remained under pressure on account of the plateauing of exports and the subsequent widening of the current account deficit.

As per the recent RBI data, the country's current account deficit (CAD) widened to 4.4% of the GDP in the quarter that ended in September from 2.2% in April-June due to a higher trade gap.

In addition, continuous rate hikes from the US Fed have pushed US Treasury bond yields higher, attracting investors seeking higher yields than they can find elsewhere in the world.

IT Stocks are performing well

Despite the concerns, there are still pockets of optimism in the market. Some sectors, such as technology and auto, have performed well so far in the current year.

The Nifty IT, which was the worst performer in 2022, losing about 26% of its value as a result of recession fears, has performed remarkably well so far this year on the back of strong earnings from IT companies. TCS, which kicked off the Q3 earnings season, delivered robust numbers for the December quarter, beating analyst estimates.

Along similar lines, other IT majors, Infosys, HCL, Tech Mahindra, and Wipro all posted decent performances in the October-December quarter. So far in 2023, the Nifty IT Index has gained approximately 2,200 points, moving from 28,621 to 30,821 points, producing a return of 7.68%.

The sector's ability to weather economic challenges and its continued growth potential made it a popular choice for investors, helping to drive the Nifty IT stocks higher.

Where will the Nifty be in 2023?

In December last year, global brokerage house Goldman Sachs, in its outlook for India, said that it sees the benchmark Nifty50 hitting 20,500 by December 2023. The brokerage also noted that India is unlikely to outperform its peers in 2023 due to expensive valuations.

The Indian market has been a strong outperformer in 2022, thanks to "stronger domestic fundamentals," but valuations have turned expensive compared to global peers. The brokerage said India’s equity market performance will likely slip behind China and Korea this year.

The domestic brokerage firm ICICI Direct Research has projected the Nifty 50 target for 2023 at 21,400, while strong support is set around 16,200 levels.

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