If the global economy and markets in 2022 were marred by the Russia-Ukraine war, a surge in crude oil prices, a spike in inflation, and a sharp rise in interest rates, the year is ending on a cautious note over a possible spike in Covid cases in the coming year.
With Covid’s impact on livelihood and the economy in 2020 and 2021 still fresh in everyone’s mind, the anxiety over rising cases in China and possible spread in other countries, including India, has dampened market sentiments somewhat for now.
While the markets were looking set to hit new milestones in line with softening retail inflation and growth optimism, and the benchmark Sensex hit an all-time intraday high of 63,583 on December 1, it has since lost nearly 4 per cent following Covid concerns, closing at 61,133.88 on December 29.
Market experts, however, see light beyond this and are pinning their hopes on sustenance in private sector investment, revival in consumption at the lower end of the economy, and continued inflow of funds by foreign portfolio investors who see India as a strategic destination over a period of five to ten years.
How big is the Covid concern?
From being an unknown-unknown, Covid is now a known-unknown, and so neither the authorities and people nor the markets are panicking. There is, however, some concern as a rise in cases may lead to restrictions that can delay the ongoing recovery process of the economy. This is what the markets have reacted to over the past three weeks.
However, while there is concern on account of health experts and the government predicting a possible rise in cases in January, there is some comfort from their assessment that India won’t see widespread hospitalisations and deaths.
What factors will shape markets in 2023?
For the economy and markets to do well, there are certain key fundamentals that need to be back on track. Chief among them are inflation, trade deficit, revival in consumption and sustenance of private sector investment. Though softening, inflation continues to remain a concern as it is still around the upper side of RBI’s tolerance limit of 6 per cent and economists feel that the central bank may go for one or two more rate hikes before it takes a pause.
The other factor that many feel that Indians need to take care of is its high trade deficit on account of rising imports and flatter growth in exports. During April-November 2022, imports rose by 29.5 per cent to $493.61 billion whereas exports rose 11 per cent to $295 billion in the same period.
As a result, the merchandise trade deficit for April-November 2022 has increased to $198.35 billion as against $115.39 billion in April-November 2021. This may keep the rupee under pressure.
Another important concern that many raise is the lag in consumption offtake at the bottom end of the economy, which is reflected in sales of FMCG products, entry level two-wheelers, among others. That is one aspect that will have to be addressed to provide inclusive growth and confidence in the economy.
Another key factor will be investment by the private sector. Experts feel that while there have been green shoots on private investment in sectors including real estate, construction, building material and renewable energy, among others, a sustained increase in that investment in 2023 will be critical for a sustained growth of Indian economy and markets in years to come.
What will FPIs do?
Before we talk of 2023, it is important to highlight some key strengths demonstrated by the Indian markets in 2022. In the first six months of the year, Foreign Portfolio Investments (FPIs) pulled out a record Rs 2,17,358 crore from Indian equities following concerns around the Russia-Ukraine war and the Federal Reserve going ahead with an accelerated pace of rate hikes in response to the multi-decade high inflation levels in the US.
Despite this huge FPI outflow, Indian premier indices remained relatively stable and corrected by nearly 15 per cent as they received support from domestic retail and institutional investors. However, over the next six months, as FPIs returned with net investment of over Rs 98,000 crore alongside the domestic investors, the Sensex rose by over 25 per cent to breach 63,000 — a level it hit for the first time in November 2022.
If that shows the resilience of the Indian markets, experts say that it has also made the Indian markets one of the most expensive in the world.
“If global investors look for value investing, they will go to markets that are cheaper on the valuation front. So, for India to remain attractive to them, it will have to be seen as a strategic destination for five to 10 years and not as an investment place for one to two years. For that, we will have to demonstrate growth in the economy, good governance both by the political class and corporates, and also show green commitment,” said Nilesh Shah, MD, Kotak Mahindra Mutual Fund.
What are the options in 2023?
Going ahead, with accelerated push by the Centre towards capex, expected revival in private investment, and peaking inflation, Nifty earnings are expected to remain robust and grow at 17 per cent compounded annual growth rate (CAGR) over FY22-24, according to a Motilal Oswal Broking report.
The Sensex, which gained 3.29 per cent in 2022, is expected to continue its forward momentum with bouts of volatility keeping the markets on tenterhooks.
While FMCG and metal provide a good defence in an inflationary environment, the auto sector in India can be a good long-term bet, with an impending transition to electric vehicles. The Indian IT sector lagged, and it may remain under stress given the uncertainties in the US market. It also indicates that domestic market-driven companies are likely to continue doing better in 2023, especially in the first half of 2023.
“In the first half of 2023, investors may look to ride the momentum of banks, auto and FMCG sectors. Then, as the global economy and especially the US start showing signs of stable recovery, investors may look at Indian IT and pharmaceutical stocks. The chemicals sector in India also appears to be a good long-term investment. Overall, Indian stocks are likely to continue performing better in comparison with other major economies, and are expected to give a 10-15 per cent return in 2023,” said Mohit Ralhan, CEO of TIW Capital.
What about the debt outlook?
Undoubtedly, the rise in interest rates in the financial system has brightened the scope for debt investments.
Since April this year, the RBI has frontloaded the monetary policy tightening, with a 225 basis points increase in the repo rate. Yield on 10-year benchmark government bonds has gone up by 86 basis points to 7.32 per cent in the last one year. The bond market is already pricing for a terminal repo rate of 6.5 per cent as the central bank is expected to continue its war to bring down the retail inflation closer to four per cent.
“We believe the peak of central banks’ hawkishness is now behind us. It is time we should look beyond the market noises and spot the emerging opportunities in the bond market,” said a fund manager.
As fixed income yields have improved significantly and are likely to rise further, the funds one can look at to make the core part of the portfolio are those that hold shorter term paper with maturities up to three years, which invest in high quality papers like government bonds, PSU and bank bonds, and highest quality corporate bonds.
Sensex hit an all-time intraday high of 63,583 on December 1, but has since lost nearly 4 per cent following Covid concerns. Express file 
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