Despite experiencing headwinds from global monetary tightening, particularly US Fed rate hikes, the Indian economy and its markets demonstrated remarkable resilience in 2023. While the year began with elevated inflation, geopolitical uncertainties, and FPI outflows, a gradual easing of these pressures later boosted investor sentiment.
India’s strong macroeconomic fundamentals, marked by robust GDP growth, moderating inflation, and a stable rupee, played a crucial role in this resilience. This, coupled with improving global conditions like softening inflation, central bank pauses on rate hikes and continued earnings growth, led to a market rally across Indian indices. Nifty50 is on track for a 20% gain, with mid-cap and small-cap indices delivering even higher returns.
Mohit Ralhan, CEO, TIW Capital, lists 10 market trends that caught one’s eye in 2023:
1. Decline in inflation: In the realm of developed markets, central banks made significant strides in curbing inflation without inflicting substantial harm on their respective economies throughout the past year. Notably, the United States, despite the Federal Reserve initiating its most assertive tightening cycle in over four decades, managed to steer clear of a recession. The effective policies implemented by developed market central banks underscore their adeptness in navigating the delicate balance between taming inflationary pressures and ensuring the sustained health of their economies. The successful management of these challenges reflects a level of resilience and strategic decision-making that has safeguarded economic stability in the face of tightening monetary conditions.
2. US yield: The abrupt surge in the US 10-year yield took investors by surprise, with the rate breaching 5%, a level not seen since July 2007. Investor concerns were heightened by Fitch’s downgrade of the US country rating, shedding light on the high fiscal deficits. The Federal Reserve’s unwavering commitment to maintaining higher rates for an extended duration also contributed to this movement.
Nevertheless, a shift occurred as inflation started to ease, prompting investors to factor in potential rate cuts. Consequently, the 10-year yield retraced swiftly in the last two months.
Investors should exercise caution, considering the Federal Reserve’s current reduction of its balance sheet and the diminishing demand from the two largest overseas buyers of US Treasuries, namely China and Japan. With these factors in play, long-term US Treasury yields are expected to stabilize at a higher level compared to the pre-pandemic period. It’s imperative for investors to stay vigilant and adapt to the evolving dynamics in the bond market.
3. China: The downturn in the real estate sector has raised concerns about the ‘Japanification’ of the Chinese economy. The combination of a sluggish job market and declining real estate values has had a detrimental effect on consumer sentiment. Despite substantial stimulus efforts from both the central bank and the government, there has been a lack of substantial growth.
The heightened leverage of Chinese corporations adds to the apprehension, as it amplifies the risk of a financial crisis. Such an occurrence could have far-reaching consequences, negatively impacting the global economy. The interconnectedness of financial markets underscores the importance of monitoring and addressing the challenges faced by the Chinese economy to prevent broader repercussions. Investors and policymakers alike need to stay attuned to these developments and their potential implications on a global scale.
4. Geopolitical tensions: The global landscape is currently as delicate as it has been in decades, marked by persistent geopolitical tensions and conflicts. The Russia-Ukraine war remains an ongoing crisis, with escalating human and economic costs. Simultaneously, the Israel-Palestine war has reemerged, contributing to the region’s instability. Furthermore, the decoupling between the United States and China continues to unfold, reflecting broader geopolitical shifts and economic realignments. These multifaceted challenges underscore the fragility of the world order, requiring careful diplomatic navigation and international cooperation to address and mitigate the potential consequences for global peace and stability.
5. Rise of the ‘magnificent seven’ stocks: The bunch of stocks comprising Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla have accounted for 90% of the S&P 500’s YTD returns. There are a mix of reasons why the stocks have done well. For stocks like Alphabet, Meta and Amazon the starting valuations in 2023 were cheap. They have also posted good earnings. In the case of Nvidia and Microsoft, the growing adoption of artificial intelligence has been at play. As we move into 2024, valuations of ‘magnificent seven’ look stretched even as other companies continue to ramp up investments in AI.
6. Indian economy surprise: The Indian economy has defied expectations, showcasing resilience and prompting the Reserve Bank of India (RBI) to revise its growth projection for FY 2024 upward to 7%, up from the earlier estimate of 6.5%. Despite subdued consumption growth, there has been a notable uptick in investment activity, attributed to increased government spending. However, a potential area of concern lies on the external front, where the risk emerges from a slowing global economy, which could exert pressure on Indian exports. Monitoring and addressing these external challenges will be crucial to sustaining the positive momentum of India’s economic performance.
7. Broader market outperformance: In the recent market dynamics, mid and small-cap indices have demonstrated significant outperformance compared to their large-cap counterparts. This notable trend is fueled by the robust performance of sectors such as capital goods, industrials, and real estate. The resurgence in capital expenditure (capex) spending is a key driver behind the strong performance of stocks in these sectors.
However, this impressive run in the mid and small-cap space comes with a caveat. Many companies within this segment are currently priced at levels that assume flawless execution and robust financial performance. Consequently, there is a heightened sensitivity, and even a slight deviation from market expectations in terms of earnings or guidance can trigger substantial corrections in stock values. Investors in this space need to exercise caution and remain vigilant, considering the potential volatility and the importance of managing expectations in the event of any unforeseen developments.
8. Domestic flows: The upward trajectory of domestic flows in the Indian financial markets has been a notable trend. Systematic Investment Plan (SIP) flows have maintained an average of ₹15,000 crores per month in the current fiscal year (FY 2024), surpassing the monthly average of ₹13,000 crores observed in the previous fiscal year (FY 2023). This consistent inflow of domestic funds, particularly through SIPs, has played a crucial role in providing a stable foundation for the market, even in the face of Foreign Institutional Investor (FII) outflows. The resilience demonstrated by domestic investors has helped mitigate the impact of external factors, contributing to the overall stability of the market.
9. Indian real estate: The real estate sector in India is experiencing a notable resurgence, with housing sales in the top seven cities registering a significant year-on-year increase of 36% in the July-September quarter, as reported by Anarock. Post Covid, the momentum in housing demand has not only been sustained but has shown signs of strengthening. A key factor contributing to this trend is the improved affordability in the real estate market.
Regulatory measures aimed at safeguarding the interests of end-users have played a crucial role in bolstering buyer confidence. Additionally, a buoyant economy, a rise in inward remittances, and the prospect of interest rates remaining subdued into 2024 collectively suggest that the upswing in the real estate cycle is poised to continue. This positive momentum paints a promising picture for the real estate market, with various factors aligning to support its growth in the foreseeable future.
10. RBI policy decisions: One of the standout features of the year has been the Reserve Bank of India’s (RBI) adept navigation of policy decisions, tailoring them to suit domestic priorities, even in the face of the Federal Reserve’s tightening. The last policy rate hike by the RBI occurred in its February meeting, and since then, the central bank has maintained a pause, a stance that contrasts with the ongoing hawkish posture of the Federal Reserve. This strategic approach has proven beneficial for the country, fostering a broad-based growth environment while keeping inflation well within the tolerance band set by the RBI. The ability to chart an independent policy course has underscored the central bank’s commitment to balancing economic growth with inflationary concerns in the context of evolving global monetary conditions.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.
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