Market Overview – June 2023

Midway through 2023, the global economy is confronting a host of unusual occurrences with US unemployment at its lowest point since 1968 whereas core inflation is higher than what it was in 1983.

Global growth has stabilized but the improvement is fragile. Global GDP growth is projected to grow at 2.7%, the lowest annual rate since the global financial crisis barring 2020 which was a pandemic year, though the forecast is higher than that predicted in April 2023. A modest improvement to 2.9% is foreseen in 2024. Further, the Federal Reserve and European Central Bank have raised rates at their fastest pace in 40 years and 30 years respectively. This is yielding results with global headline inflation expected to fall from 8.7% in 2022 to 6.8% in 2023 and further to 5.2% in 2024.

Apart from country specific deviations, such as possible rebound in US GDP in 2025, businesses will do well to prepare for a slowing economic growth environment over the next decade with estimated average annual growth rate of 2.6% in the next decade, down from an average annual growth of 3.3% in the decade leading upto the pandemic. Further, emerging Asian economies will be leading this growth whereas mature markets like US and Europe will be making smaller contributions to global GDP over the next decade – Ex: “India will contribute 15% of the global GDP growth in 2023”

India’s GDP growth for FY24 has been revised upwards to 6.5% which is a 0.2% increase from the earlier projection done in April. Domestic economy is resilient with manufacturing PMI at 31 month high, strong trends in domestic air passenger traffic, e-way bills, toll collections, diesel consumption, consistent credit growth of more than 15% for the last many months, GST collections crossing Rs 1.6 lakh Cr mark for the 2nd consecutive month etc.

The major concern area was weakness in rural demand and risk of below normal monsoon due to prevailing El Nino conditions. However, monsoon so far till mid-August is 2% above normal at pan-India level. Further, this being a pre-election year, rural demand should witness healthy recovery with likelihood of higher spending by both State as well as Central Government via some populist spending measures remains high.

Since April 2023, Indian markets have rallied 13% upto July helped by stable macroeconomic outlook and reducing inflation. Q1’24 earnings have also been encouraging with robust improvement in profitability across sectors. The small and midcap indices have outperformed the large benchmarks during the current quarter lending strength to the trend of narrowing valuation differential.

FPIs have pumped Rs 30,660 Cr into stocks in July so far, pushing up share valuations. In the April-July period, FPIs pumped in ~Rs 1.07 lakh Cr ($12.5 billion) into equities. The major catalysts/reasons behind such aggressive FPI inflows are a) Resilient domestic economy backed by strong macro data; b) Healthy monsoon so far reducing fears of El Nino; c) Expected stable interest rate scenario worldwide; d) US Q1 GDP reassessment from 1.3% to 2% and e) stable exchange rate.

In the sample size of 2937 listed companies, net sales for Q1’24 grew by 5.3% Y-o-Y, growing at the slowest pace since Jan-March 2021. The slowdown in revenue growth was felt across sectors with the exception of Banks & NBFC and Automotive companies.

Households may be feeling the pinch of higher inflation but corporate India is enjoying record high margins and profits. The combined quarterly net profit of listed companies scaled a new high in the April-June 2023 quarter, growing by 47.2% Y-o-Y. Major reason for such a strong increase in profits was reduction in RM costs as well as energy cost savings.

Banks & NBFC, Auto & Auto Ancillary and Oil & Gas companies accounted for nearly 90% of India Inc’s net profit surge in Q1’24 over Q1’23. In contrast, Metal and Mining, IT, Power and Consumer Durables reported Y-o-Y decline in profits.

We had mentioned in our last communique that whenever market has turned positive, we have significantly outperformed the benchmark indices and this time is no different.

Earnings for Nifty are expected to experience a substantial Y-o-Y increase of ~20% in Q1’24 and ~15% for FY24. Hence, in our opinion, India equities at all-time highs isn’t necessarily a cause of worry even though valuations are now slightly above long-term average.

For Care PMS, out of our top 7 holdings which in total account for more than 50% weightage in our consolidated holding, only 2 companies performed below our expectation whereas 4 companies significantly outperformed our expectations.

We would like to end the update with the following quote: