Extreme volatility due to global macro:
The markets in the month of March remained flattish; it performed as per our expectation and traded between 16800 and 17900 levels. Last month, there were two significant developments in the financial markets that could have an impact on domestic fixed-income investors. Firstly, the Indian central government released its borrowing intentions for the first half of 2023-24, adhering to its habit of front-loading its borrowing. As a result, the government is expected to borrow a significant amount of money in the first half, amounting to 57% of its total borrowing for the fiscal year. This will lead to a substantial supply of government paper, approximately Rs 8.8 lakh crore, across various tenures between April and September. As a consequence, bond investors will need to be cautious and prepare themselves for the increased supply of government paper in the market. Additionally, there were incremental updates regarding the US banking crisis, which may have an impact on the global financial markets especially if there is any new major news. In March, the net FII investments in the market were Rs 1,997.70 crore, indicating a moderate inflow of foreign funds. On the other hand, the DIIs continued their strong support, investing Rs 30,548.77 crore in the market. This indicates that domestic investors have maintained their confidence in the Indian economy and the stock market, despite the ongoing volatility and uncertainties. The strong support from DIIs has provided stability to the market and has helped to cushion the impact of FII outflows, thereby reducing the market’s overall risk. It will be interesting to see how the trend continues in the coming months and how it impacts the overall market sentiment. Nifty closed out at 17360 levels and Sensex closed out at 58992 levels.
Looking at the sectorial performance for the month of March, most sectors were volatile with positive bias. However, there were a few sectors that outperformed their peers i.e. Pharma, Realty and Financial services.
Here are our views on some sectors:
- Auto: The Indian auto sector has witnessed a series of developments in Q4FY23, with some key highlights. The Auto Expo 2023 showcased new product launches and technical capabilities in the alternate fuel domain. Wholesale volume prints for March 2023 were robust, with the industry ending the year with ~20% volume growth in FY23P. However, the sector has been facing some challenges as well, such as resurging raw material prices, fresh price hikes announced by OEMs in response to the transition to BS-VI stage 2 norms, and chip supply issues. The Electronic Component Units (ECU) shortage continued to impact production in FY23. Despite these challenges, the sector has seen steady growth in domestic sales, with SUVs and vans leading the way. The Indian auto ancillary manufacturers bring various parts to the market, with passenger vehicles and two-wheelers accounting for the major chunk. The recent uptick in retail auto sales has put the limelight back on the auto industry, with retail sales in January and February 2023 increasing by 30% YoY. Overall, the Indian auto sector remains a significant contributor to the country’s GDP and has witnessed steady growth in recent years.
- Metals: The domestic Hot Rolled Coil (HRC) prices in the traders’ market have risen by Rs500/te week-on-week (WoW) to Rs60,000/te due to a price hike of Rs1,000-1,500/te taken by major steel players across the flat products segment. On the cost front, coking coal prices have corrected by a further US$18/te to US$265/te, the lowest thus far in CY23. As a result, the spot spread has risen to Rs30,080/te, the highest since Nov’22. Meanwhile, export prices have fallen by US$7/te, WoW, tracking Chinese export prices and lower prices in Vietnam. However, Europe presents a good opportunity in the next two months as Arcelor Mittal may witness delays in domestic deliveries across Europe due to fire in Northern Spain and France, which impacted two blast furnaces over the last two weeks. Primary mills might face price pressures in the near term as inventory in the system is high. However, traders expect a modest cut or primary rebar prices to be rolled over from Mar’23 levels. Based on these factors, it is expected that the EBITDA margin of all the players will improve further quarter-on-quarter (QoQ) on higher realization and lower to flat coal costs. EBITDA of ferrous players in India is likely to improve QoQ by Rs1,500-2,000/te with higher realization and lower coking coal cost up to USD10/te. Steel players with relatively higher reliance on exports are likely to benefit from better realization in Europe. Additionally, Al players are likely to witness improvement in EBITDA/te on higher realization and up to 5% lower coal cost. Overall, for Q4FY23E, steel companies are likely to report a sequential increase in EBITDA/tonne primarily aided by an uptick in steel prices. Ferrous players look better placed considering the improving spot spreads and better traction in the domestic market. However, macro uncertainties and an adverse environment is the key stock overhang.
- Consumer Durables: The revenue growth of this sector is expected to be slow, with a projected YoY increase of 10%, driven by the paints and large appliances categories. Paint players are expected to report a volume growth of 10-12% YoY, with decorative paints leading the way, and inventory buildup at the dealer’s level. Large appliances players like Havells and Voltas are expected to report revenue growth in the range of 12-13% YoY, with strong demand for ACs. Plastic piping companies are also expected to see volume growth of 12-13% YoY, driven by strong demand for plumbing products. Despite higher advertising and promotional expenses, the EBITDA margin is expected to recover ~100 bps QoQ due to easing raw material prices and positive operating leverage. The demand for discretionary products is expected to be driven by the easing of inflationary pressure, rationalization of channel inventory, and pick-up in construction activities.
- Telecom: In Q4FY23, the Indian telecom sector is expected to witness a deceleration in mobile revenue growth quarter-over-quarter (QoQ) due to two fewer days during the quarter and the absence of tariff hikes. The subscriber base for Bharti and RJio is likely to expand while that for VIL will most likely continue to shrink. RJio has grabbed higher incremental revenue probably as it gains subscribers as Bharti has increased its base plan price. On the other hand, VIL’s revenue is expected to dip. EBITDA margin expansion is likely to be limited, or decline, due to the rise in network operating cost owing to 5G deployment, which means higher loading charges and more power consumption. Overall, the telecom sector in India is expected to witness mixed results, with some companies expected to perform better than others due to factors such as subscriber additions, price hikes, and cost optimization measures. The focus will remain on capex, FCF generation, net debt levels, and the impact of 5G deployment on network operating costs.
- Banking: credit growth momentum in the banking sector softened in February 2023, standing at 15.9% YoY as compared to 16.7% YoY in January 2023. Despite this, private banks are expected to see an industry-beating performance in credit growth, driven by healthy traction in the retail and SME segments. Corporate lending is also expected to see a healthy pick-up in demand. On the deposits side, the industry’s growth stood at 9.6% YoY as of March 2023, with an average deposit growth of 13.6% YoY. Operating income is expected to be healthy, while net interest margins (NIMs) may face some pressure from the increased cost of funds. However, earnings momentum is likely to remain strong, driven by continued robust credit offtake, steady elevated margins, and stable credit cost. Overall, the banking sector is expected to see further traction in deposits and continued improvement in asset quality.
Important events & Updates
A few important events of the last month and upcoming ones are as below:
- The Reserve Bank of India (RBI) recently announced a pause in its rate hike cycle, following a series of 250 bps increases since May 2022. The decision was influenced by a moderation in inflation as well as a projected level of economic growth that is deemed to be comfortable by the central bank.
- India’s annual consumer inflation rate dropped to 5.66% in March 2023, the lowest since December 2021, down from 6.44% in February and slightly below the expected 5.8%. The decline was primarily due to a slowdown in food prices, specifically vegetables, oils, fats, and meat, which partially offset the rise in the cost of cereals, milk, and spices. The inflation rate is now below the RBI’s upper tolerance limit of 6%.
- In March 2023, the S&P Global India Manufacturing PMI attained a three-month peak of 56.4, surpassing market expectations of 55.0, and up from 55.3 in the preceding month. The information indicated that output expanded at the swiftest rate since December of the previous year, surpassing the long-term average, with new orders escalating to a three-month high. Furthermore, there was an acceleration in export sales, and purchasing activity demonstrated the most substantial growth since May 2022.
- In March 2023, the S&P Global India Composite PMI decreased to 58.4, after reaching a 15-month high of 59.0 in February, although it remained above its long-term average. This development indicates the 20th consecutive month of expansion in private sector activity, with both goods producers and service providers recording sustained growth.
- Foreign exchange reserves which had rebounded back from $524.5 billion to $576.8 billion on Jan 23 is now up to $578.45 billion in the first week of April 23.
- In March 2023, the S&P Global India Services PMI fell to 57.8, below market expectations of 58.3, from the prior month’s 12-year high of 59.4. Despite the decrease, the most recent data indicates that the service sector has grown for 20 consecutive months.
- India’s industrial production rose to 5.6% YoY in February 2023, exceeding market projections of 5.1%, on the back of increased factory activity. This growth is up from the previous month’s upwardly revised figure of 5.5%.
- Gross GST revenue collected in March 2023 came in at 1,60,122 crore. Revenues for March 2023 were 13% higher than GST revenues in the same month last year.
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Outlook for the Indian Market
The outlook for the Indian markets is mixed for the near term. While there are positive indicators such as sequential margin expansion due to moderation in commodity prices, an uptick in credit growth, and a visible uptick in high-frequency indicators such as GST collection, power consumption, and E-way bills, there are also several challenges that could impact the market. The weaker macroeconomic conditions, rising interest rates, rising oil prices due to upcoming cuts, banking challenges in the US and European markets, and moderation in discretionary demand may weigh on the market. Additionally, the export-oriented sectors are likely to lag behind, putting pressure on commodity producers and potentially causing challenges for the broader economy. The recovery of rural demand, however, is a bright spot, with a potential further pick-up in the upcoming month due to better Rabi crops. Corporate commentaries on the FY24 demand outlook and margin recovery will be closely watched by the market, as will the recovery of the rural economy.
The Reserve Bank of India’s reports present an optimistic outlook for households and industry, but the fight against inflation is not over yet, and core inflation remains high. The fact that the monetary policy committee chose to pause instead of hiking rates by another 25 basis points suggests that the RBI is taking a cautious approach to policy changes.
Overall, the Indian market is likely to experience a brief pause in the broad-based earnings momentum that has remained robust for multiple quarters. The market will need to carefully navigate the challenges posed by macroeconomic conditions, interest rates, and global banking challenges while leveraging positive indicators such as rural demand and credit growth to drive growth and recovery. The outlook for this month on fundamental & technicals is explained.
Fundamental outlook: The Indian market in March 2023 witnessed a mixed trend with volatility in both directions. The Indian markets are facing a challenging environment due to the possibility of a broad-based banking crisis and the recent surprise move by OPEC+ to cut output, taking the total cuts to 3.66 mn bpd, which is designed to take up oil prices. While India is better placed than other countries due to importing a bigger share of its oil imports from Russia, costs are likely to increase in relative terms. This poses a risk for India on the current account deficit front, which had brought good news as it had fallen sharply in the October-December quarter. On the positive side, India’s real GDP growth for 2022-23 is estimated at 7.0%, with private consumption and public investment as the primary drivers of growth. Economic activity remained robust in Q4, with a 6.2% expected increase in rabi foodgrains production for 2022-23. Industrial production and services sector indicators also showed healthy growth. Real GDP growth for 2023-24 is projected at 6.5%, with Q1 at 7.8%, Q2 at 6.2%, Q3 at 6.1%, and Q4 at 5.9%. While the RBI’s decision and accompanying hawkish statement seem to be the best course of action for now, the Indian markets will need to navigate the challenges posed by the banking crisis, potential inflationary pressures, and the OPEC+ output cuts in the near term.
Technical outlook. In March, the Indian market was one of the better performers compared to some of its global peers. Most of the high-frequency indicators such as auto sales, PMI, credit growth, CPI etc. are providing positive signals for the Indian economy. The MPC will continue monitoring these economic indicators, and the RBI will continue to ensure price and financial stability while supporting growth. Looking at the technicals, the Nifty 50 has immediate resistance at 18000 and major resistance around 18600 levels for the month of April. There is immediate support at 17000 levels and major support at 16300 levels. The RSI for the Nifty 50 is around 59.5, which signifies that it is in the moderate zone.
Outlook for the Global Market
The US markets may face some challenges in the near term due to the combination of persistently high prices, high-interest rates, and tightening credit conditions. This is expected to have a negative impact on business investment, consumer spending, and the transaction markets. All interest-rate-sensitive sectors are experiencing a notable pullback, with the housing sector suffering the brunt of the correction. Home sales have plunged by 30% over the past year, and construction activity has followed the downfall with a lag. Additionally, business investment activity is softening, and in this environment of softening final demand, inventory management has become a central concern for business executives. However, despite these challenges, US stocks managed to eke out gains in holiday-thinned trading as investors shrugged off fears of one more Federal Reserve interest-rate hike following strong US jobs data. This indicates that there is still some confidence in the US markets. Overall, the US markets may face some headwinds in the coming months, but the resilience of US stocks in these challenges suggests that there is still room for cautious optimism. The outlook for the Eurozone markets appears to be mixed. The restrictive monetary policy is likely to weigh on domestic demand and production and labor market growth may slow down. However, the overall outlook is not dire, and there are some positive factors that may support the economy. Consumer spending is expected to receive support from government measures, and wage growth is expected to accelerate. Additionally, disinflation may help to boost consumer spending. Furthermore, external demand is likely to benefit from China’s reopening, which could support the Eurozone’s export-oriented industries. Overall, while there are some challenges facing the eurozone economy, there are also some positive factors that may help to mitigate these challenges. The near-term outlook is likely to be mixed, but with the right policy measures and support from external demand, the eurozone economy may be able to weather these challenges and continue to grow in the longer term. China’s economy has been a major driver of global growth over the past few decades, but there are now concerns about several headwinds that could affect its future prospects. While the property market has shown signs of stabilizing, it is unlikely to drive a material recovery for defaulted developers, who will need to focus on completing unfinished homes in the next several years. This may dampen homebuyer confidence and raise working capital requirements for these projects. On the other hand, high-quality developers have benefited from supportive policy measures and increased access to onshore funding, especially bank lending. This has led to a rebound in onshore and offshore bond prices for non-defaulted developers. Overall, the array of supportive measures by the central authorities since 4Q22 has had a positive impact on the China markets. However, limited onshore bond issuance for private developers and muted offshore issuance by both state-owned and private developers continue to pose challenges. It remains to be seen how these factors will shape the China markets in the coming months.
Outlook for Gold
During March, the Gold market experienced a big rally, with prices rising by around 10%, this massive movement is on the back of volatile macroeconomic conditions. The demand for Gold as a hedge against uncertainties continues to remain strong. This is especially true as advanced economies remain concerned about the possibility of a recession. The outlook for gold remains slightly positive for the near term. Investors may continue to turn to Gold as a way to manage risk in their portfolios and protect against potential downturns in the global economy.
What should Investors do?
India’s strong fundamentals, robust macroeconomic indicators, and easing inflation have contributed to the Nifty 50 trading at a premium valuation compared to other global equity indices. Interest rate hikes have paused due to moderated inflation within the RBI comfort range, although upcoming oil cuts may impact FMCG companies that recently lowered prices in anticipation of lower raw material and oil prices. The rural demand recovery is a bright spot, with the potential for a further pick-up in the coming month due to better Rabi crops.
Market participants will closely monitor corporate commentaries on the FY24 demand outlook and margin recovery, as well as the recovery of the rural economy. While export-oriented sectors may lag behind, putting pressure on commodity producers and potentially causing challenges for the broader economy, positive indicators such as sequential margin expansion due to moderation in commodity prices, an uptick in credit growth, and a visible uptick in high-frequency indicators such as GST collection, power consumption, and E-way bills suggest that the market can weather the challenges and continue to perform relatively well in the near term.
Taking into account global and domestic macroeconomic factors, we anticipate that the Indian markets may experience volatility, but overall performance could be positive in the upcoming month, particularly during the earnings season. We suggest that investors consider adding quality stocks with solid fundamentals to their portfolios, particularly those available at a relative discount. A rally in the near term before consolidation is expected due to the attractiveness of the Indian economy compared to its global peers.
This article should not be construed as investment advice, please consult your Investment Adviser before making any sound investment decision.
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