Inflation, recessionary fears, US Fed future policy action, geopolitical risks and rising Covid cases in China are likely to keep the equity markets volatile, said Sneha Poddar, AVP Research, Broking and Distribution, Motilal Oswal Financial Services. In an interview with MintGenie, Poddar highlighted the outlook for 2023.
Inflation has come down and the growth outlook is intact. Is our market out of the woods?
Inflation came in at an 11-month low of 5.9 percent year-on-year (YoY) in Nov’22, marking the first below 6 percent reading in the calendar year 2022 (CY22).
However, almost the entire fall is led by vegetables, which declined 8.1 percent YoY in the month. Excluding vegetables, inflation was up 7 percent YoY last month, compared to 6.7 percent YoY each in the prior three months. Thus inflation data was not comforting at all.
At the same time, IIP data for Oct’22 was very poor, which is a key input into quarterly GDP estimates. So far, the GDP growth outlook is intact but depending upon November’s IIP data, there is a risk of downward bias in 3QFY23 GDP estimates.
We believe that there will be at least one more rate hike of 25bp in Feb’23 by the RBI before considering any pause depending upon macro data points.
Thus we cannot say the market is out of woods as the inflation risk still continues and would dictate RBI’s future course of action.
In addition, there are various other global uncertainties like recessionary fears, US Fed future policy action, geo-political risks and rising covid cases in China, which are likely to keep the equity markets volatile.
Could the market meet your expectations in 2022? How would you review the year?
Though we were expecting a lower double-digit return from the market at the start of CY22, that looked difficult as the various global uncertainties gripped the market from the start.
Still, India outshined global markets in the year as it stood resilient to several headwinds like high inflation, rising interest rates, currency swings, geopolitical uncertainties and the onslaught of FII selling.
This resilience has been led by several structural tailwinds, placing India in a bright spot.
The driving force behind India’s outperformance was the solid corporate earnings growth of 24 percent CAGR over FY20-22 as well as a pick-up in Capex by the central government which revived the Indian economy from the Covid-led slump.
Several macro data points also reflected the buoyancy in the domestic economy.
The number of retail investors is growing rapidly in our country. What has facilitated their rise?
Attractive equity returns compared to other asset classes drew retail investors big time towards the equity market.
Retail participation in the stock market has touched one of the highest levels ever during this period.
The total demat accounts now stand at 10.6 crore as of Nov’22 – 2.5 times since Mar’20.
In fact, the opening of new demat accounts monthly, on average, increased seven-fold since FY20 to nearly 26 lakh per month as of Nov’21.
This led to a sharp jump in market volumes where cash volume grew by 9 percent in FY22 while derivatives jumped 2.6 times. This was despite the introduction of margin norms during the year.
This rise of retail investors is a structural shift which is being seen towards equities, away from the traditionally preferred physical assets, such as gold and real estate, as well as bank deposits.
There are a couple of factors driving retail investors to the stock market.
The millennials are recognising the importance of savings and are getting attracted towards the equity market.
Increasing digitalisation is also making it easier to open demat/trading accounts and start investing from the comfort of one’s home.
Further low-fee trading platforms are attracting huge participation, especially the day traders. Millennials have a huge risk appetite as compared to earlier generations.
Thus, with improving investor education and growing awareness, an increasing number of retail investors from tier-2 and tier-3 cities have been actively participating in equities.
While retail investors are flocking to the market, it can be said most of them do not understand the difference between gambling and investing. How should one pick a stock for investment?
The new investors are getting lured by the quick returns from the market and thus are putting money into the market without really understanding what they are investing into.
There are looking at the equity market more as a fast money-generating avenue without analyzing its consequences in an adverse situation.
Retail investors, especially new investors, should understand that the equity market is not a place for gambling and could result in heavy losses.
Even if investing for the short term, one should have an understanding of where and why he is putting money otherwise in the majority of cases, there are chances of getting trapped.
In order to make a thoughtful investment, they should identify the growing sectors and good quality stocks within them which hold good potential.
Depending upon one's risk appetite, one can diversify amidst large, mid and small companies and among various sectors.
They should focus on the growth prospects of the company and whether it can deliver it on a sustainable basis.
Then one can start adding the stock to the portfolio on a gradual basis and later can build a bigger position in it if he gets the opportunity at lower levels. Otherwise one may miss good investment opportunities during a market rally.
We know the benefits of compounding but for many investors, buying a stock and sitting on it for 10 years does not make much sense. How does one know it is time to sell the stock?
One should not blindly buy a stock and sit on it for 10 years without any monitoring. It is important to periodically reassess your investment and get out of the stock if it does not meet your investment criteria.
If there is any adverse news, one should analyse its long-term impact or if the stock has been an underdog for a long time, what are the reasons and whether can it turn around or not.
Similarly, if it has run up a lot, then one needs to see if it still holds potential and whether it justifies its current pricing.
Similarly one needs to assess industry developments, competitors' actions and government policy changes that could have an influence on ones holding.
What is your outlook for the market for 2023? What sectors one should buy in, going into the new year?
India stands out like an oasis in the desert, whereas the rest of the world is facing multiple challenges. Domestic flows too have remained strong and now FIIs have turned buyers.
Nifty now trades at a one-year forward P/E of 20 times, which seems fair, in our view.
As we step into CY23, global uncertainties like recessionary fears, geo-political risks and rising covid cases in China are some of the factors that are likely to keep the equity markets volatile.
US Fed policy actions in 2023 along with RBI’s would hold importance where any moderation might encourage markets to pick up momentum.
The Union Budget would be crucial as 2023 is the last year before the General elections in March 2024 and hence could have major policy-led initiatives.
We expect two themes to play out in CY23 such as credit growth and Capex and thus sectors like BFSI, capital goods, infrastructure, cement, housing, defence, and railways could be in focus.
Disclaimer: The views and recommendations given in this article are those of the analyst. These do not represent the views of MintGenie.