In 2022, equity investors had a difficult time. One event after another spooked market sentiments, whether it was the crypto currency crash, the Russia-Ukraine war, or inflation and higher interest rates. In addition, FIIs sold heavily, putting pressure on the rupee.
How much more upheaval can we anticipate in the coming year? Will things worsen before they improve? Will the equity asset class continue to underperform globally, as it did in 2022? We believe there are reasons to be optimistic about 2023, as it could usher in a slew of new opportunities.
Here are our eight predictions for the coming year
The rate of inflation would have either reached its zenith or begun to decline
Inflation will start to decrease after central banks around the world aggressively raise interest rates (the United States did the highest 425 bps rate hike in 2022, which is the record since 1950). Inflation is declining in both the United States and India. The same way central banks were wrong to believe that inflation would be transitory, central banks are likely to be wrong about inflation being persistent.
The high-base effect will kick in, and rate hikes will have a lag effect on economic activity. We are confident that the Fed and RBI will begin cutting interest rates in the second half of 2023. This should re-rate the equity market.
Crude oil could be priced in the range of $90 to $100 per barrel
This year, the average price of a barrel of crude oil in India was $98 per barrel, the highest since 2013. The higher crude oil price influenced both inflation and the rupee. However, with economic activity slowing, OPEC may limit output, implying that crude should remain in the $90-$100 range. However, we do not anticipate the volatility in crude oil prices that we witnessed in 2022.
The economy of China could worsen further
We believe China is experiencing structural issues that will prevent the economy from growing by even 3% in 2023, despite the IMF's prediction of 4.4% growth for China. The ratio of Chinese government debt to GDP has reached all-time highs, indicating structural problems within the country's economy. With the Chinese economy slowing, it will create more opportunities for the Indian economy.
Despite the current downturn, the US economy would eventually bounce back
Given that the US Federal Reserve has already indicated that interest rates have reached their benchmark and that there is now little room for aggressive rate hikes, the Fed may begin to lower interest rates next year. This would be very beneficial for global markets because it would alleviate concerns that the United States is entering a recession. We believe that the US economy will expand in 2023 as compared to 2022. The US economy's growth would be back ended, with the second half of the year expected to be faster than the first.
It's likely that war between Russia and Ukraine would subside
Hostilities between Russia and Ukraine erupted in February 2022. It could end in 2023, providing much-needed relief to the world. Furthermore, by that time, the market would have overcome its fear. There has never been a market event that has had such a long-term impact on investor sentiment.
The rupee could appreciate to ₹80
In 2022, the rupee fell by 9% against the dollar. It is currently trading at ₹82.86 to the dollar. We expect robust FDI and FII inflows to augment the rupee from its current levels. Foreign institutional investors (FIIs) have rekindled their buying interest in recent months, indicating that the rupee will strengthen upon the return of the dollar. Our sense is that the rupee should appreciate to ₹80. This is also on the assumption that the Fed will cut rates in 2023.
In the coming year, the IT industry could outperform all others
IT was one of the industries that struggled the most in 2022. This is primarily due to higher attrition rates and global economic uncertainty. However, there are adequate indicators that the attrition rate has either peaked or is about to peak. We continue to believe that IT companies will be in high demand due to their high corporate governance standards, strong balance sheets, and investor-friendly attitude. As a result, IT is one sector that has the potential to generate significant wealth for investors.
Look forward to gain after the pain of 2022
Investors took a major hit in 2022. But now is the time they would begin to start taking advantage of the market's gains. A good time to invest is when there is a lot of bad news in the market. Market anxiety is on the rise due to concerns about a possible economic downturn, high inflation, and increasing interest rates. One year from now, these conditions might not be present. When weighing the potential benefits against potential dangers, the odds strongly favour the benefits.
Keeping in mind that India may be poised to enter a golden age of investing, let's usher in the New Year with a renewed focus on our financial objectives and the Indian equity market.
Sunil Damania is the Chief Investment Officer at MarketsMojo.
Disclaimer: Sunil Damania is the Chief Investment Officer at MarketsMojo. The views, thoughts and opinions expressed in this publication are contributions in his personal capacity and do not necessarily represent the views of MarketsMojo or the management.