scorecardresearchNifty at 18,700: Has the market discounted all risk factors?

Nifty at 18,700: Has the market discounted all risk factors?

Updated: 30 Nov 2022, 08:17 AM IST
TL;DR.
It would be appropriate to ask ourselves whether, at nearly 1,8700, Nifty is adequately taking into account all the factors that may impact the corporate performance, risk appetite, liquidity and financial stability in 2023?
In the past one year, India has been one of the best-performing equity markets in the world.

In the past one year, India has been one of the best-performing equity markets in the world.

The benchmark indices in India are now trading at their highest-ever levels.

In fact, in the past one year, India (+9.6%) has been one of the best-performing equity markets in the world, in line with emerging market peers like Brazil (+8%), Russia (+9%), and Indonesia (+7.5%), etc.

Only a few emerging markets like Venezuela (+107%), Argentina (108%), and Egypt (+15%) have done much better.

For many Indian investors, these statistics could be meaningless. To some it may actually be annoying as the performance of their individual portfolio may not be reflecting the benchmark performance.

Regardless, largely the equity market returns have been reasonable, considering the challenging environment. It is therefore a moment to celebrate.

Once the celebrations are over, it would be appropriate to ask ourselves “whether, at nearly 1,8700, Nifty is adequately taking into account all the factors that may impact the corporate performance, risk appetite, liquidity and financial stability in 2023?”

In particular, I would like to assess the risk-reward equation of my portfolio, especially in light of the following factors, for example:

Stress on discretionary spending

In recent months several companies have rationalised (or announced the plans) their workforce. A significant number of highly paid workers are facing prospects of job loss.

Anecdotal evidence suggests that the uncertainty created by a 2% workforce rationalisation could temporarily impact the discretionary consumption plans of at least another 48% of employees who retain their jobs.

Reportedly, IT hiring from the top colleges in India is likely to witness a 50% fall in 2023. We might see similar trends in other sectors also as most managements have guided for moderate growth in the next few quarters.

My recent visits to several rural areas indicated that discretionary consumption in farmer households has already been impacted by poor income in the 2022 Kharif season.

As per reports La Nina (excess rains) conditions that impacted crops for the past four seasons, are likely to persist through the Rabi season, while the 2023 Kharif season might witness El Nino (drought-like) conditions.

Erosion in the wealth effect

On the last count, India had more than 115 million crypto investors. About two-fifths of these investors were below the age of 30, thus having a strong risk appetite.

These investors had seen sharp gains in their crypto in 2020-2021 but apparently, they are now sitting on material losses in their portfolios.

A significant number of new listings, especially from tech-enabled businesses, are trading at material losses to their immediate post-listing prices.

These businesses typically have a material part of their employee compensation in the form of ESOPs. Many employees who had seen substantial MTM gains in their ESOP values have witnessed material drawdowns in their portfolio values.

A few of them might be facing a double whammy of material MTM losses and tax liability. A number of small and midcap stocks that jumped sharply higher in 2020-21 have corrected sharply in 2022.

Obviously, the wealth effect created by the euphoric moment in stock and crypto price moment has subsided to some extent.

This submission of wealth effect shall also affect risk appetite, consumption pattern and investment behaviour of the concerned investors.

Tightening fiscal conditions

Many market participants are betting on continued financial support to infrastructure and defence spending, and incentives like PLI, etc.

It is pertinent to note that the forthcoming budget would be the last full budget before the general elections to be held in 2024.

It is likely the government chooses to increase the social sector funding at the expense of capital expenditure next year.

The disinvestment program might also be slowed down to avoid adverse publicity for the government. The imposition of additional tax(es) or hike in capital gains tax could also be considered.

All these events could impact the investors’ sentiment.

Rising external vulnerabilities

The external sector has been weak for a few quarters now.

The trade deficit in October 2022 widened to a worrisome US$26.91bn. Exports dropped about 17% in October 2022 on slower global demand, while imports were still higher by nearly 6%.

Notwithstanding the efforts of the government to improve trade accounts by import substitution and export promotion, the exports have grown at a slow 4.3% CAGR in the past three years, whereas the imports have registered 14.3% CAGR in the same period, resulting in a larger trade deficit.

The external situation thus remains tenuous.

It is pertinent to note that the World Trade Organization (WTO) has projected a sharp slowdown in world trade growth in 2023. Obviously, the pressure on the balance of payment will remain elevated in 2023.

Cash on the sidelines may protect the downside

Overnight (liquid) funds are not yielding a return of nearly 5% p.a. Bank deposits are offering a 5.5-6% return.

Under the present circumstances, at nearly 18,700, the upside appears limited to 8-10% while the downside could be much more than 10%.

Obviously, the risk-reward equation is not favourably placed at this point in time, and the opportunity cost of holding cash is not bad. This could keep a lot of money waiting on the sidelines.

Higher costs of carry and margins have also resulted in lesser leveraged positions in the market. The cash on the sidelines and lower leverage may keep the downside somewhat protected.

(The author is Director - Equal India Foundation)

Disclaimer: The views and recommendations given in this article are those of the author. These do not represent the views of MintGenie.

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First Published: 30 Nov 2022, 08:17 AM IST