Budget Outlook 2023-24

As we enter 2023, India could continue to benefit from a high investment-to-GDP ratio (at 33% in FY23 versus 30.5% in FY21), higher infra, railway, road, and defense spending by the government; continued revival in the real estate sector, PLI-driven investments and supply chains are being consciously decoupled as national security concerns outdo economic efficiency.

Flashback 2022

  SYNOPSIS:

Despite geopolitical uncertainties, high global inflation and consistent selling by foreign investors in India, domestic flows remained resilient helping the benchmark indices hit new all-time highs this year.

Here are eight key factors that moved Indian stock market in the year 2022:

1. Omicron wave

We entered the year 2022 with a third wave of coronavirus in India led by Omicron infections. The number of infections reached a peak in January 2022, post which the wave receded. Since then many variants of Omicron emerged in 2022, but thanks to the immunity gained, none of them resulted in a wave.

2. Russia-Ukraine war

As the concerns around coronavirus infections receded in early 2022, Russia announced a ‘special military operation’ in Ukraine marking the start of a full-scale invasion of Ukraine. The attack by Russia was condemned internationally with many countries imposing sanctions on Russian trade.

3. Global Inflation

Global central banks had kept a loose monetary policy and dovish stance for two long years since the breakout of coronavirus in 2020 to support growth. Even before the world could come out of the impact of the pandemic, Russia attacked Ukraine. As a result, the commodity prices started to rise leading to higher crude prices which had a cascading effect on food prices and other products and services.

Among other repercussions of Russia-Ukraine, global inflation has been a very big one in the aftermath. The world faced a synchronized inflation outbreak as food and energy prices surged in Asia, Europe and US.

US inflation surged to as high as 9%, while in India the number was around 6-7%. 

If inflation does not start to slow, we are looking at an uglier scenario. Fortunately, we believe there are already convincing signs that inflationary pressures are moderating and will continue to do so in 2023.

With central banks ratcheting up their response to a global inflation shock, debate is shifting from when they'll win the war to whether faster rising prices are here to stay in a supply-constrained world.

4. Fed rate hike

In a bid to curb high inflation, the global central banks started to lift key benchmark rates. In the light of high inflation and steep increase in central bank interest rate around the globe, US dollar started to gain strength.

The Federal Reserve and other central banks have been fighting inflation which surged due to supply chain shortages and an energy crisis due to the COVID-19 pandemic and Russia's invasion of Ukraine.

The Indian rupee ended 2022 as the worst-performing Asian currency with a fall of 11.3%, its biggest annual decline since 2013, as the dollar rocketed on the US Federal Reserve's aggressive monetary policy stance to tame inflation. In November, US Fed indicated that it will reduce the amount of interest hike, but did warn of sticky inflation saying that rate hikes will continue for some time.

Even in the Indian Reserve Bank of India warned of inflation remaining high for longer than anticipated time duration.

5. Europe energy crisis

The year 2022 was a challenging one for the European countries - be it on humanitarian grounds or financial fallouts.

The bloc grappled with Russia's invasion of Ukraine and its financial consequences such as high inflation, deep energy crisis and slowed growth.

To condemn the attack on Ukraine, European countries put out sanctions on Russia and reduced trade of fuel supplies such as oil and gas from the country.

The European nations scrambled to find alternative supplies when Moscow switched the Nord Stream 1 pipeline off to retaliate against sanctions.

6. Massive FII selling

The tighter monetary policy by US Fed and other global central banks led to risk-off sentiment among foreign investors, who started to pump in money into safe haven assets such as US dollar and gold.

With lesser liquidity in the system, foreign institutional investors withdrew money from riskier emerging markets such as India. And the Indian equity market paid a high price for that.

Though much of the flows did return to Indian market later in the year

7. Resilient domestic flows

While high global inflation, FII selling and coming out of a post-pandemic world posed big problems for the Indian market, the only factor that supported the Indian equity market was high inflow from domestic channels.

During the pandemic, a lot of new retail investors entered the market and continued to keep up participation even in 2022.

Another factor for domestic flows on the Dalal Street was inward facing economy due to post-pandemic era in 2022 and geopolitical uncertainty internationally. High inflation, slowing growth in US and Europe were some of the other global concerns keeping investors positive about domestic economy.

Domestic flows into Indian equities remained resilient in 2022 helping the benchmark indices hit new all-time highs this year

8. Slowing growth, recession

After the central banks started tightening the monetary policy, the concerns of a hard landing emerged. Experts are predicting a modest slowdown or a recession in the US in 2023.

Economic growth in Europe already started to slow in 2022.

The International Monetary Fund cut global growth forecasts again recently warning that downside risks from high inflation and the Ukraine war were materializing and could push the world economy to the brink of recession if left unchecked.

Global real GDP growth will slow to 3.2% in 2022 from a forecast of 3.6% issued in April, the IMF said in an update of its World Economic Outlook. It added that world GDP actually contracted in the second quarter due to downturns in China and Russia, a Reuters report said.

Source: www.livemint.com

Indices Score - Card 2022

Source: www.nseindia.com, www.bseindia.com

SECTOR OUTLOOK 2023

Budget Expectation 2023

Synopsis:

As we enter 2023, India could continue to benefit from a high investment-to-GDP ratio (at 33% in FY23 versus 30.5% in FY21), higher infra, railway, road, and defense spending by the government; continued revival in the real estate sector, PLI-driven investments and supply chains are being consciously decoupled as national security concerns outdo economic efficiency.

“The key expectation from Finance Minister Nirmala Sitharaman is to maintain the growth path while keeping fiscal deficit and inflation in check,”

Emerging Markets (EMs) are likely to benefit from a relatively more benign world vs. 2022. However, India’s trailing outperformance could take a breather in H1CY23, given relative valuations.

That said, India is likely to have better growth than most parts of EM due to a relatively strong macro environment.

A range of policy reforms implemented over recent years set the base, while further policy action has empowered people and boosted financial savings, directing flows into equities.

Key developments tracked in 2023 (other than earnings) would be state elections, Union Budget, RBI monetary stance, Trends in trade and fiscal deficit, inflation moves, geopolitical situation globally, commodity price trends globally, economic growth momentum in the world, etc.
In 2023, BFSI, Industrials, and Automobiles may outperform due to the tailwinds enjoyed by these. This apart from the defence and renewables stocks could bounce up faster than others given the visibility of revenue and margin growth in these two.

BFSI enjoys tailwinds like rising credit demand, stable NIMs and gradually improving asset quality. Industrials can benefit out of public CAPEX which has been robust and private CAPEX which could take off soon.

Automobiles can benefit due to large order backlog, easing of supply bottlenecks and expected improvement in rural incomes/wealth.

Indian Rupee outlook in 2023:
Indian Rupee showed lagging recovery vs the USD after INR outperformed till April/May 22 compared to other currencies.Rupee fell due to geopolitical worries (Russia -Ukraine War), surging inflation and rising global Interest Rates, the rising dollar index, rising trade deficit, FPI outflows, weaker currencies of peers, and high crude oil prices.

Outlook for 2023

Positives
• Foreign institutions have turned net buyers in the last couple of months
• Better macros compared to peers including recovery in High-Frequency Economic Data
• Peaking of US interest rate and inflation.
· Weakening US Dollar index
· Inclusion of India sovereign bonds in the global bond index

Concerns
• Longer and deeper recession across the globe boosting USD and impacting exports
• Political setback to the ruling alliance
• Risk off sentiments impacting FPI and FDI inflows
• Crude oil prices shoot up
• Trade deficit continues to rise

Few headwinds which India has to battle in the first 6 months of 2023 :

Worries for India include core inflation remaining entrenched at 6% YoY with most items witnessing no let-up in momentum, pressure on fiscal deficit due to MNREGA spending & subsidies, high Current Account Deficit (4.4% in Sept 2022 quarter – a 9-year high), the fiscal deficit in India (Centre and Total) not likely to come back soon to prudent levels after the Covid breach.

 Expectations from Budget 2023:
The upcoming Union Budget (on Feb 01) will be the last full year budget from the Modi government ahead of the Lok Sabha elections due in early 2024.

The key expectation from Finance Minister Nirmala Sitharaman is to maintain the growth path while keeping fiscal deficit and inflation in check.

The Centre is likely to over-achieve its receipts in FY23, allowing it to meet higher-than-budgeted spending without breaching its fiscal deficit targets.

The Centre wants to achieve a deficit of 4.5% by FY26. To reach there, it must reduce the same to 5.6-5.8% of GDP in FY24 vs 6.4% in FY23.

A fiscal policy concern that needs to be urgently addressed is the significant compression of capital expenditure in most states, despite the ₹1 trillion interest-free loan provision for capital expenditure by states, which is exacerbating the growth slowdown.

Tackling a slowdown in growth and a rise in the Current account deficit could be the focus areas of the Union budget.
Markets would like FM to
1) stick to the fiscal consolidation path and not go populist
2) do not tinker with Capital Gains taxation
3) remove double tax on buyback through open market
4) not tinker with direct tax rates
5) keep borrowings under check so that interest rates in the system do not rise further
6) provide further incentives on exports of goods and services to bring trade/current account deficit under control
7) widen the tax net without increasing compliance requirements.

Interest Rate Scenario 2023:

Short-term interest rates in India may have already seen a peak by now. However longer-term interest rates may stay elevated for some more time till global interest rates peak out and pressure on INR reduces.

If the long-term interest rates in India start to soften sometime later than those abroad, it will help Rupee stabilise and start recovering.

Once the Rupee starts reversing from the bottom (vs the USD) we may see stability in the stock markets and the beginning of a recovery.

 Source: www.livemint.com

Conclusion :

Relastic Approach 

1. Central Govt likely to focus on fiscal consolidation.
2. Budget to strike a balance between infra investment and welfare schemes.
3. India set to witness the impact of recession in developed economies
4. Amid sticky core inflation, the high interest rate regime may continue.
5. Railway may target Rs. 2 Trillion from freight in FY 24.

Key Challenges in Manufacturing Sector:

1. It will be essential to build a resilient and responsive supply chain.
2. Cyber risks is viewed as the biggest challenge.
3. The democratisation of digital technologies will accelerate adoption and drive productivity gains.
4. Organisations facing a shortage of talent will have to keep up with digitisation and upskill their workforce.
5. From an ESG perspective, automated data capture and reporting will be critical for net zero and decarbonisation disclosures.

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