Sensex has lost the psychological mark of 60,000 while Nifty has fallen below 18,000 level — not exactly what small investors would have wanted, especially, at the beginning of 2023. Foreign portfolio investors are playing a spoilsport, as they are back on Dalal Street after Christmas and New Year holidays, not as bullish, as they were in December.
But there are reasons to it.
In last few weeks, some major developments happened globally. China stopped disseminating Covid figures amid a surge in cases and the US Fed’s tone, as suggested by minutes of December policy meet, remained hawkish, raising fears of the global economy hitting the brakes going ahead.
Demand worries were all visible in a two-day 9 per cent plunge in crude oil prices earlier this week.
If the world economy suffers, India would not be an exception. Investors globally are taking stock of the situation.
For retail investors back home, 2022 was a bit disappointing, given the tepid 4 per cent return by equity benchmarks. But globally, key markets (excluding Russia) fell up to 25 per cent in local currencies last year. This has made India look relatively unattractive vis-à-vis some of the battered markets. With the rupee tumbling to new lows this week, FPIs have many reasons to play spoilsport.
Valuations
Nifty is trading at a 12-month forward return on equity (RoE) of 16 per cent, above its long-term average. On the other hand, India’s market capitalisation-to-GDP ratio stands at 108 per cent of FY23E GDP estimate, above its long-term average of 79 per cent.
India was up 4 per cent in 2022 against a 25 per cent plunge in Korean market, 22 per cent decline in Taiwan market, 15 per cent drop in Chinese stocks, and a sharp 31 per cent fall in Russia shares. It was up against a 22 per cent drop in the MSCI EM index.
In P/E terms, the MSCI India index is trading at a 132 per cent premium to the MSCI EM index, above its historical average of 67 per cent. That was among reasons global brokerages were not much positive on India. UBS has a target of 18,000.
Hawkish Fed
The US Fed seems to be in no mood to end teh rate hike cycle. A strong jobs market has been fuelling fears that the interest rate hikes may continue for a prolong period.
Minutes released for the Fed’s December 13-14 policy meeting this week suggested that US policymakers felt the central bank should slow the pace of its aggressive interest rate increases. That said, policymakers were still focused on controlling the pace of price increases that threatened to run hotter than anticipated, and were worried about any ‘misperception’ in financial markets that their commitment to fighting inflation was flagging, Reuters reported.
Rupee weakness
The rupee was trading 15 paise to 82.47 higher against the dollar in Friday’s trade. But the domestic currency earlier this week slumped 22 paise to close at its all-time low of 83 against the dollar. A weak domestic currency eats into FPIs’ return on investments.
ICICIdirect believes the rupee may face resistance near 84 level. It, however, sees the domestic currency to strengthen back to 78 level in coming months, as the Indian economy is in better placed compared to its peers and will be able to withstand any external headwinds.
FPI outflows
Weakness in rupee has weighed on the sentiment. Data showed FPIs have pulled Rs 5,872 out of domestic market so far in January compared with an inflow of Rs 11,119 crore in December and Rs 36,239 crore in November.
“FPIs sold for the 10th consecutive day on Thursday, taking the cumulative selling to Rs 11,400 crore. The underperformers of last year like China and Europe are doing well. Clearly, FPI money is chasing lower valuations by selling in overvalued markets like India,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
Others
Investors are also cautious ahead of the December quarter earnings season, kicking off from Monday. A handful of IT earnings will follow including that of Infosys, HCL Technologies and Cyient on January 12 and Wipro on January 13. HDFC Bank will be the first bank to report December quarter results on January 14. Brokerage Angel One would report quarterly results on January 16; ICICI Lombard and ICICI Prudential Life Insurance Company will report quarterly results on January 17.
Meanwhile, Amisha Vora, co-owner and joint managing director Prabhudas Lilladher said that the Calendar 2023 will be a story of two halves, with the first half seeing the burden of rising interest rates, recessionary fears, the Russia-Ukraine war and their after-effects.
Also Read: Bajaj Finance, Bajaj Finserv shares extend fall; down up to 10% in three days
Also Read: TCS Q3 results: 5 things to watch on Monday as IT firm shares December quarter earnings