The word ‘recession’ has been the talk of the town amid slowing growth and rising interest rates globally. Stocks have been hit hard, be it in the US or China. The widely-tracked US indices namely the Nasdaq Composite, the S&P500 and the Dow Jones Industrial Average have cracked 33 per cent, 23 per cent and 17 per cent, respectively, so far in 2022. Markets across Hong Kong and mainland China have also taken a beating, falling 28 per cent and 15 per cent, respectively, during the same period.
Despite all these risks, domestic stocks have climbed wall of worries and delivered handsome returns vis-a-vis regional peers.
The BSE Sensex is in the positive territory, rising 0.27 per cent to 58,410.98 on October 17 from 58,253.82 on December 31 last year. On the other hand, the 50-share Nifty index has declined marginally 0.24 per cent to 17,311.80 during the same period.
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In an interaction with Business Today, Alok Agarwal, Portfolio Manager at Alchemy Capital Management said the ongoing outperformance is attributable to a number of factors, including robust corporate earnings over the past two years, reasonable valuations and a robust economic strength.
“Nifty profits increased by 70 per cent during FY20-22 and there are expectations for a healthy performance over FY22–24,” Agarwal said. He said resilient domestic equity inflows and astute macroeconomic management by the Reserve Bank of India (RBI) and the government, have enabled India to clearly stand out against the fear-filled global economy.
Data available with the corporate database Ace Equity showed that domestic institutional investors have poured Rs 2.59 lakh crore in the equity market since January 2022. On the other hand, foreign institutional investors have sold shares worth Rs 1.77 lakh crore during the same period.
The market watcher believes that India would keep outperforming, even when the cycle turns. “There are chances that the market may surprise investors with a handsome double-digit return by next Diwali 2023,” Agarwal added.
The 30-share index Sensex has declined nearly 3 per cent since Diwali last year.
Key risks
The portfolio managers said that the key overriding theme in the markets has been that of quantitative tightening. The top five central banks’ balance sheets swelled from $4 trillion in 2008 to $26 trillion now, which means a total of $ 22 trillion of money got printed during the period.
This eventually found its way into various asset classes including stocks, bonds, and housing, Agarwal said.
“The process of withdrawing the same has just begun, and so far, less than $1 trillion has been withdrawn. These are causing tremors in world markets. The multi-decade high inflation has forced central bankers to take action. Incremental commentary by Central Bankers on their tightening or withdrawal of the same is likely to provide a major signal for the markets,” Agarwal added.
Apart from the tightening cycle, Agarwal believes that the geo-political tensions are yet another factor to watch out for. “They have the power to cause major disruptions in every asset class,” he said.
Investment themes
For sector-specific investors, he advised zeroing in on themes like banking, automobile and industrials. While giving the investment rationale, he said that the banking sector’s balance sheet is the strongest it has been in the last 9 years, especially in terms of credit cost potential.
In the automobile space, volumes have improved across segments on a weak base.
“In the auto space, margins are expected to improve sequentially as commodity prices are cooling and volumes are improving,” he said adding that a likely revival in the private capex will support industrials going ahead.
