Our Market View

Sanjiv Mehta  |  2023-07-31

The major news in July 2023 related to the corporate earnings of the first quarter (April – June) of Financial Year 2023-24. Overall, these have been as expected, generally good but a bit mixed too and with no major re-ratings. The banking and infrastructure sectors reported very good numbers though information technology was not as good. On the whole, earnings are improving and in the second half of FY 24, are expected to pick up and across multiple sectors.

India’s major stock market indices, Sensex & Nifty 50 continued to move up with Nifty 50 touching almost the level of 20000. Presently, it has corrected a bit and is close to 19600. The markets have moved up for the last four consecutive months and the last time it happened was in the year 2017. It is possible that the foreign flows might abate for some time.

Indian macro-economic indicators continue to be impressive. As indicated in our last note, we expect the Indian economy to continue to grow at a healthy rate due to moderate inflation risk, strong fundamentals, healthy corporate sector balance sheets, rollout of structural reforms, sound external sector, and fiscal policy thrust on capex. Therefore, the long-term trend for Indian equities remains up, though it is probable that they may trend sideways periodically.

The sectors which are likely to do well include auto components, defence, renewable energy, capex, industrials, electronics, beverages, and banking. Net Interest margin is dropping slightly because of increased competition for deposits, but the banks are expected to overcome this challenge because of strong credit growth, very good asset quality, and under leveraged positions of major corporates.

Globally, the Federal Reserve raised, as expected, the interest rates by 25 basis points citing that though inflation has fallen, the economy is still showing strength in terms of good employment numbers and consumer spending. Inflation numbers still remain significantly higher than their target of 2%. Though It is possible that the Fed might increase the interest rates once more but irrespective, it is clear that the monetary tightening cycle is very close to ending. It is probable that a few Asian countries, including India might even be able to decrease their interest rates starting early 2024.

There is a risk of China going through Japanification(term used in a recent book on China economy) – they have a property bubble, high corporate and personal debt and worsening demographics – this can cause a balance sheet recession since all participants try to reduce their debt. No country grows at a fast rate when demographics are not supportive. It is expected that China might announce a major fiscal stimulus soon, in order to stimulate its economy.

Consequently, for the medium-term goals (anything above 3 years), allocation to equities should remain completely intact. Fresh money could be invested in tranches, utilizing the STP route- systematic transfer plan. At this stage, profit preservation should totally be related to the individual goals and not because of the market view. If the time horizon of a goal has lessened or if we are close to the target amount, it is prudent to preserve profits after a fast ascent. In my book ‘Winning the Wealth Game’, I had given a cricket analogy that if we are chasing a total of 300 and we reach 250 for 2 in 35 overs, it is sensible to take less risks and reach the target rather than getting skittled out. Also as always, with the global uncertainty, some part of the portfolio should always be invested in high-quality short-term debt funds to take care of liquidity and any contingencies.