This is not a typo!
This term is not commonly used by equity investors but is widely used in the cryptocurrency market. It is an acronym for Fear, Uncertainty, and Doubt.
The recent banking crisis in the US and Europe emerged without warning. Prior to the news of the collapse of Silicon Valley Bank and Signature Bank, the financial sector appeared stable. In Europe, Credit Suisse was bailed out by UBS, nudged by the regulator.
These events have instilled fear and uncertainty in investors, who now question the stability of other financial institutions and their potential vulnerability to collapse. Consequently, there is growing doubt about the ability of the equity market to provide meaningful returns to investors in 2023.
For four consecutive months, the equity market has given negative returns. This trend has occurred only twice in the last 23 years. There is no instance in recent history of the Indian equity market closing in the red for five consecutive months.
At present, the market is struggling with numerous challenges, and unfortunately, there is no clear understanding of the potential outcomes.
In this article, we aim to identify and analyse the key events that could significantly influence market sentiments in the near term.
March results and commentaries
In the upcoming days, India Inc will begin announcing their financial results for the March quarter. Market participants will not only scrutinise the figures for this period but also pay close attention to the tone of management commentary. The focus will be on how management envisions the next 12 months, whether they plan to increase capital expenditure (CapEx) or reduce it considering uncertainties in the global environment.
Another crucial aspect will be how banks anticipate the movement of their net interest margins (NIMs) and the potential impact of rising interest rates on non-performing asset (NPA) levels. The insights provided by India Inc's commentary will determine if there is a need to revise earnings growth projections for FY 2024.
RBI view on inflation
It is widely anticipated that the Reserve Bank of India (RBI) will implement a 25 basis points (bps) rate hike in the upcoming monetary policy, culminating in a total of 265 bps rate increase since May 2022. However, market participants are keenly interested in the accompanying commentary, which may provide insight into the future trajectory of rate hikes.
Striking a balance between fostering growth and controlling inflation will prove challenging for the central bank. At this delicate juncture, the RBI must determine which objective takes precedence. The options include either permitting growth to suffer as a consequence or easing the inflation target range. As a result, the monetary policy for the new financial year will be of critical importance for the market.
Update on El Nino
Preliminary indications suggest a high likelihood of an El Niño event this year, which may lead to deficient rainfall between June and September. Various agencies, including the India Meteorological Department (IMD), are expected to provide updates on the likelihood of El Niño occurring by mid-April.
The country is also grappling with unseasonal rain in many regions, causing damage to crops. A clearer assessment of the extent of damage to rabi crops due to unseasonal rain will emerge over the next 30 days. A double-digit percentage of damage could pose challenges in controlling food inflation and may affect the purchasing power of the rural economy.
Although fast-moving consumer goods (FMCG) sales in rural India increased in February, it is uncertain whether this trend will persist, as it depends on the impact of unseasonal rain and the potential El Niño event.
Sharp drop in valuation
Over the past 12 months, India's valuations have experienced a significant decline. In FY 2022, the country's market capitalization to GDP ratio was 112 percent, which decreased to 95 percent in FY 2023. The budget has projected a nominal GDP growth of 10.5% for India, with a 12-month forward market capitalization to GDP ratio of 86%. Recently, India's return on equity (ROE) has seen an improvement. Logically, due to its enhanced ROE, India should command a higher market capitalization to GDP ratio compared to previous years.
The risk-reward ratio in the equity market currently favours reward. However, it is important to note that the market is not expected to experience a one-sided upward movement. The market is likely to remain choppy due to a combination of positive and negative news flow. Consequently, it is crucial for investors to manage their fear, eliminate doubts about negative equity returns, and embrace uncertainty. Adopting this mindset will help overcome fear, uncertainty, and doubt (FUD) in the investment landscape.
While FY 2023 posed significant challenges for equity investors, I anticipate that FY 2024 may offer returns in the teens for investors. It is important to note that these returns are more likely to be back ended rather than front ended.
Sunil Damania is the Chief Investment Officer at MarketsMojo.