Dear Investor/Associate/Partner
In this month’s market outlook we shall focus on
- Global market turmoil and volatility in India stock market over the past period
- Forex Reserves and Narrowing Trade Deficit data
- Valuations
- Outlook for FY24 and Themes that we are focussed on
Global market turmoil and volatility in India stock market over the past period
March’23 witnessed heightened volatility as global markets had to digest stress from several banks. Silicon Valley Bank equity plummeted to zero with marked to market losses. Similarly, some other US banks suffered impact on their net worth on account of mark to market losses on government papers. We examined this in the Indian context and think that this issue should not crop up in India. Our 10-year bond yields were lower than current yield levels for a period of only around one year. In comparison, the current US yields are the highest over last 10 years, implying mark to market losses on bulk of government securities.
Moreover, more recently, when US was pumping in liquidity, the yields were negative also implying very sharp MTM losses. What started as a banking issue in the US also caused stress in Europe; CSFB had to be provided a lifeline. Even Indian markets witnessed selloff in banking. Given that our banks are not impacted and are reporting continued improvement in asset book, a sell off here could be a good entry point for investors.
The issue plaguing global banking is of sharp MTM losses and the only cure for that is lower bond yields. Post SVB debacle, we saw sharp drop in global bond yields. Despite Feds continued rate hikes in response to inflation we hope that lower bond yields would sustain on the back of liquidity injections. Lower bond yields, should overtime, result in risk assets recovery.
Forex Reserves and Narrowing Trade Deficit data
In India, we are beginning to get dissents from the members of the committee itself if the increase in interest rates is now enough. Happily, the recent trade data points to lower deficit and Forex reserves have been sustaining. Balanced external account and comfortable forex situation (steady forex) would allow the RBI to de-couple policy making vs the west.
Crude has cracked sharply from USD 85/bbl to sub USD75/bbl with global economic issues. India being one of the largest importer of crude globally, benefits to the tune of USD13-14bn in terms of savings on an annual basis given that prices sustain at these levels. Lower commodity prices could improve attractiveness of India to global investors.
Indian investors are focussing on investing in debt/ insurance products to take advantage of the small window of opportunity left before tax arbitrage available to insurance investors is taken away. We expect this to normalize moving into April. The month of April should see HNI interest come back to equity asset class supported by lower starting valuations, better sentiment on lower commodity prices and lesser attractiveness of alternative investments like debt on a post-tax basis.
We believe that the starting valuations are very defendable. Our framework is of 18-18.5x one year forward earnings of the index as being the fair valuation range. This is higher than long term average because the complexion of the index itself has changed overtime and very long term averages are less relevant. With FY24 EPS expected to be in 950 to 1000 range, the current level of the index should be seen as tad lower than fair value. This implies earnings growth related returns as we go forward.
FY24 is expected to see a slowdown in nominal economic growth both as a consequence of a fall in real growth as well as in inflation. Nominal GDP growth could be around 8%; lower than budget assumption of 10.5%. However, earnings growth is expected to continue to be between 15 to 20% on account of margin expansion on commodity price normalisation. Going ahead, engineering, autos, consumers, cement and other manufacturing sectors should all benefit from margin expansion. Bank margins are expected to peak out over the next 2 quarters as the rate hike cycle ends. However, they would continue to see relatively strong growth, lower credit costs and efficiency related gains in cost structures which should keep profit growth in line with business growth. IT sector should see some benefit from lower attrition and higher utilisation rates though slower growth in new order booking should be expected. We continue to be focussed on Engineering and Defense, Lending, New Age Tech companies, Hospitals, Retailers, and Autos in our portfolios.
Best Regards,
Prateek Agrawal
Executive Director – Motilal Oswal Asset Management Company Limited
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