At first glance, it may appear to many that the domestic market ended on a disappointing note in 2022. However, another aspect of the reality is that it still outperformed many of its global peers in the year gone by.
Nifty50 ended 2022 with a gain of 4.33 percent while Sensex clocked a similar gain of 4.44 percent. The Nifty Midcap 100 index rose 3.50 percent, but the Nifty Smallcap 100 index suffered a loss of 14 percent.
On the other hand, the US market witnessed its worst year since 2008.
Highlighting the outperformance of the Indian market, G Chokkalingam, Founder & Head of Research at Equinomics Research & Advisory Private Limited, said the S&P 500 fell nearly 20 percent and NASDAQ crashed 33 percent in 2022. European indices ended 9.5 percent to 11.9 percent lower and most Asian indices also fell anywhere from 5 percent to 25 percent in 2022.
In Asia, the worst affected were the Chinese and South Korean markets while equity markets in India, Singapore, Indonesia and Malaysia gained marginally in 2022.
The outperformance of the Indian market can be attributed to easing inflation, economic resilience, the support of retail investors and a strong show of metal, banking, FMCG and auto stocks.
Brokerage firm Kotak Institutional Equities believes 2022 may be the template for the next few years, due to (1) heightened geopolitical risks, (2) higher interest rates, (3) slowing China, and (4) large climate change-related uncertainties.
Will this outperformance continue in 2023?
It is too early to predict the course of the market for the whole year. Some analysts say it is a futile exercise since there is so much uncertainty and the market might not have factored in all variables at this point in time.
Analysts and brokerage firms believe that the Indian market will outperform its global peers in 2023 even though the year will be a challenging one due to macroeconomic headwinds and geopolitical issues.
"2023 will be a challenging year for equity markets since the global economy is slowing down. But India has the potential to outperform- both the economy and markets. There is impressive credit growth, CAPEX and revival in real estate segments," said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
"India’s market outperformance will be driven by a mix of good economic growth, continuing domestic inflows into the market and perhaps FIIs turning buyers when the dollar index starts declining steadily. Good earnings growth in banking, capital goods and telecom can support markets" said Vijayakumar.
Chokkalingam believes in the first half of 2023, the domestic equity market may outperform provided possible global risks of a major war in Taiwan, mutation of existing Covid variants into any deadly variant and crude oil hitting bubble zone ($120-140 or higher per barrel) do not emerge.
India's biggest strength is the domestic-centric nature of its economy. Even though the country cannot completely decouple from global sentiment, its economic resilience and domestic investors will save it from a crash.
"The status of the fastest growing economy, the robust outlook from the agricultural and banking sectors, relatively India’s public debt remaining under control, an anticipated boost to the CAPEX plan by the government in the 2023 Budget, robust tax collections, few major States in India setting up an ambitious goal of reaching $1 trillion economy, good performance of Indian Railways in both passenger and freight segments, etc. should augur well for the markets in 2023," said Chokkalingam.
Fresh concerns over the rich valuation of the Indian market have emerged. As brokerage firm Motilal Oswal Financial Services pointed out, Nifty’s 12-month forward P/E is trading at 18.9 times versus a long period average (LPA) of 19.7 times and its 12-month forward P/B stood at 3 times, at a premium of 12 percent to the Nifty’s historical average of 2.7 times.
"Valuation for Nifty50 has remained at a premium since the start of 2016. However, valuation dipped below its LPA during CY20 led by the pandemic. Earnings uncertainty over the past two years has resulted in high volatility in valuations during the period. However, with strong economic recovery, resilient corporate earnings and domestic tailwinds, Indian markets recovered fast and continue to outperform global markets," Motilal Oswal said.
"Further upside from hereon will be a function of stability in global and local macros and continued earnings delivery versus the expectations in the near term," said Motilal Oswal.
If we talk about the global economy, inflation is expected to come down in 2023 which will result in a pause in rate hikes.
However, the looming recession in the US and Europe, the emergence of any new and deadly Covid variant, fresh geopolitical tensions such as the war in Taiwan which involves the US, and a surprise upswing in crude oil and other commodity prices are the risks that cannot be ignored.
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.