Nifty closed 2022 marginally higher and resumed 2023 in a subdued tone amid global macro headwinds

India’s economy may grow around 6.50-7.00% and Nifty earnings 15-20% in FY24. India has a huge potential to improve its GDP/Capita, now lowest in G20

India’s benchmark stock index Nifty closed 2022 marginally higher (+3.25%) and resumed 2023 in a subdued tone on global macro headwinds and the concern of synchronized recession on both sides of the Atlantic as well as Pacific (Europe-U.S.-Asia) amid synchronized global tightening (higher borrowing costs). Both Wall Street and Dalal Street are now dancing to the tune of U.S. economic data; especially employment and inflation coupled with never-ending Fed jawboning.

On Friday (6^th January), data shows the U.S. December NFP job report as soft/goldilocks. Although headline NFP job additions were above market expectations, wage growths were slightly below market estimates. As Fed is now focusing more on containing wage growth to contain inflation, risk trade jumped on hopes of a terminal rate of +5.25% instead 5.50-6.00% (higher than the projected terminal rate for 2023 in Fed’s December SEP). Fed is now looking for the moderation of U.S. wage growth along with rebalancing the labor supply and demand equation, so that overall core PCE inflation comes down meaningfully. U.S. core PCE goods inflation is now already moderating along with housing.

The market is now expecting a +25 bps rate hike each in February, March, and May for a terminal rate (interbank-FFR) of around +5.25% (5.00-5.25%) and then a pause. Overall, a weaker USD and softer US bond yields, coupled with hopes of a further easing of December core CPI data to be released Thursday boosted Wall Street as well as Dalal Street Futures Friday, recovering from early week losses briefly, but again stumbled on hawkish Fed talks, indicating Fed may go for 5.50-6.00% terminal rate by May/June’23 and stay there till early 2024 at least. This is contrary to market expectations of the Fed pivot (lower terminal rate around +5.00%, early pause, and rate cuts by late 2023).

As U.S. core inflation is now around +6%, substantially above pre-COVID levels of below +2%, but the unemployment rate at 3.7% is almost around pre-COVID +3.5%, Fed is now preferring to bring core inflation down to pre-COVID +2% levels by further rate hiking; there is enough policy space for maximum employment mandate; Fed is ready to tolerate 4.5-4.7% unemployment levels (from present 3.5-3.7%) to bring core inflation down to around +2.00% (from present levels of +6.00%).

In any way, Fed/Powell will do this job by keeping financial (Wall Street) stability in a calibrated manner/jawboning as the financial market functions on expectations, not the real outcome. Fed may go for calibrated tightening (100/150 bps) by May-June’23 for a terminal rate of 5.50%-6.00% (around real positive wrt core-PCE/CPI) and then pause. Fed talked about the proper balancing of inflation management and economic growth for a softer/softish landing.

India’s Nifty gained around +3.25% in 2022 and +48.85% in the last 3 years, while Bank Nifty jumped +18.64% in 2022 and +34.75% in the last 3 years. Against this backdrop Wall Street’s Dow Jones slumped -9.40% in 2022, but gained +15.76% over 3 years; Nasdaq 100 -33.89% and +16.03%; S&P 500: -19.95% and +18.69%; Euro Stoxx 50: -11.50% and +1.59%; China A50: -17.44% and -10.16%; FTSE 100: +0.91% and -2.24%; Hang Seng: -15.01% and -30.47%

Nifty made a small gain of around +3.25% for 2022, outperforming all the major G20 peers in a 7^th consecutive year of gains, but the least since 2018. India outperformed its global peers significantly despite global macro headwinds and lingering geopolitical tensions coupled with synchronized global tightening led by the Fed and globalization of sticky inflation. But eventually, Nifty EPS gained by around +15% on an annualized basis, whereas S&P 500 EPS contracted around -10.50% on an annualized basis (till September QTR) on an average.

India’s RBI also followed Fed and goes for a +225 bps hike in the repo rate to bring down core inflation in India, elevated around +6.00%, substantially above RBI’s target of +4.00% and also at the upper tolerance band (2.00-4.00-6.00%). But RBI’s strategy to follow Fed resulted in INR stability and also restored RBI's credibility in prioritizing inflation management while keeping economic growth momentum in line.

As a result, FPIs returned from around mid-year, and coupled with that robust corporate earnings growth, largely stable macros, and resilient domestic demand, FPIs turned net buyers. Also, India’s political and policy stability helped despite global turbulence. India is now being seen as a ‘bright spot’ in a gloomy global macro cloud.

As a stable and world’s largest democracy, India now matters more to the rest of the world than a few years ago. Thus India is now able to keep good geopolitical relations with two major superpowers (U.S.-Russia) at the opposite end of the spectrum, keeping its own economic and other interests intact (under the strong leadership of PM Modi). India is also able to keep good business/diplomatic relationships with other major European countries, Australia and Japan even after buying Russian/Iranian oil extensively at a favorable rate.

Although there were some minor skirmishes with China at LAC recently (after a joint military exercise with the U.S. in the Ladakh area, close to LAC with China), there is no concern about a major flare-up. India-China occasional geopolitical skirmishes at disputed LAC area may be now a part of domestic political compulsion by both sides amid the forthcoming general election in India (2024) and Chinese COVID spikes/economic slowdown. Such LAC skirmishes may be useful sometimes by political leaders to divert public/media attention from core issues.

In any way, India is now a vibrant economy and angel investors are keen to invest in the appeal of 5D (demand, demography, development, democracy, and digitalization) and Modinomics (reform and performance). India’s Nifty made a new high around 18887.60 in early December before making a low of 15183.40 in June (after Russia launched the Ukraine invasion and Fed/RBI goes for a rapid tightening mode to bring sticky inflation down). Nifty jumped almost +25% from the June low to December high and closed the year around 5% down from the top.

Indian manufacturers and tech/IT service providers took advantage of structural changes in global supply chains and uncertainty in Asia as China continued to suffer from COVID-induced lockdowns and Europe continues to buy refined crude oil products from Indian companies amid Russian supply restrictions. The Indian economy is growing around +7% (y/y) despite higher borrowing costs (interest rates) and elevated inflation as India is primarily a domestic consumption economy with little external debt/vulnerability.

Also, India is providing significant targeted fiscal stimulus in different forms and huge capex to support economic growth and employment despite higher inflation. The Indian government is also taking some corrective steps to improve supply and bring down inflation. Unlike Europe, India is not dependent on imported food. The banking/financial system is now robust and banks are lending prudently even with +18% advance growths; banks are now writing-back NPAs from past write-offs; i.e. recovering past bad loans. Most of the major Indian corporates are also reporting +20% annual growths in core operating EPS amid robust demand and deleveraging.

Indian consumer spending is also resilient despite the higher cost of living because almost 30% of the Indian population, equivalent to the entire U.S. population has stable jobs/income (government and reputed corporate employees), and has adequate real wage growths regularly. Many Indian super riches are now growing rapidly, thanks to the vibrant stock and real estate market, though income inequalities are also growing.

Also, despite DEMO in 2016, the flow of black money in the Indian economy is still robust due to rampant corruption at almost all levels, especially in various infra projects (cut money) and even certain state levels of government employment. Thus, despite higher inflation, higher borrowing costs, and higher cost of living, Indian consumer spending is still robust. And the Indian economy/society is now also running normally (without any COVID masks) as the country was able to turn the pandemic into an endemic successfully in late 2021 by achieving dual herd immunity (natural infections and artificial vaccinations).

In brief, India is now being seen as an island of stability in a turbulent ocean despite higher USDINR and higher oil. Higher USD is good for Nifty EPS as almost 60% of Nifty revenue comes from exports. If we consider Indian service export, robust remittances, and stable FDI inflows, relatively Indian CAD (current account deficit) servicing is quite manageable; no need for any undue concern/panic.

In 2022, the Indian stock market was boosted by PSU and private banks, surging around +69% and 19% on higher NIM, lower NPA/stable asset quality. PSU banks also jumped from a lower pre-COVID base by around +73% over the last 3 years. Dalal Street has also boosted metals (+21.60%), FMCG (+17.74%), energy (+14.16%), automobiles (+13.94%), and infra (+5.58%). On the other side, the Indian market was dragged by techs/IT service exporters (-27.03%), pharma (-11.44%), media (-11.35%) and realty (-11.32%).

In 2022, Techs were under the stress of the concern of a looming recession on both sides of the Atlantic and possible lower tech spending. Also, the sentiment of techs and pharma was affected as the global pandemic largely turned into an endemic (except in China). Media stocks were affected as the world turns into OTT/digital from television and print. Interest-sensitive real estate stocks were under pressure on higher borrowing costs.

If we consider a 3-year time frame, then metals boosted most (+140.27%), followed by Techs/IT (+79.13%), PSU banks (+72.73%), energy (+62.47%), infra (+60.58%), automobiles (+55.04%), pharma (+54.55%), FMCG (+47.05%), realty (+44.90%), private banks (+24.20%) and media (+13.36%). Nifty gained around +48% in the last 3 years (pre-COVID, since Jan’20).

In 2022, Nifty was boosted by Adani Enterprise (+124.21%), M&M (+52.77%), ITC (+51.83%), Coal India (+45.75%), Axis Bank (+34.76%), Indusind Bank (+33.29%), NTPC (+33.13%), SBI (30.40%), Britannia (+19.50%), Eicher Motors (+18.26%), ICICI Bank (+18.22%), Bharti Airtel (+17.91%), Sun Pharma (+17.73%), JSW Steel (+16.24%) and Cipla (+14.78%).

In 2022, Nifty was dragged by Wipro (-45.56%), Tech Mahindra (-41.62%), Divi’s Labs (-27.17%), HCL Tech (-21.90%), Tata Motors (-20.85%; Chinese/European slowdown), Infy (-20.25%), TCS (-14.86%), BPCL (14.05%), DRL (-12.92%), HDFC Life (-12.74%), Asian Paints (-11.20%; higher crude oil price), Apollo Hospitals (-9.95%), Bajaj Finance (-9.43%), Ultra Tech Cement (-9.26%) and Bajaj Financial service (-9.08%).

For a 3-year’ time-frame, Adani Enterprises jumped the most (+1748.30%), followed by Apollo Hospitals (+202.41%), followed by JSW Steel (+184.60%), Tata Steel (+144.06%), Tata Consumer Products (+140.60%), M&M (+137.95%), Grasim (+130.75%), Titan (+127.33%), Cipla (+127.56%), Sun Pharma (+124.80%), Hindalco (+124.51%), Adani Ports & SEZ (+115.29%), Tata Motors (+106.10%), Infy (+102.96%), Divi’s Labs (+84.63%) and SBI (+83.97%). Nifty was dragged most by BPCL (-26.08%; lingering disinvestment fiasco), Indusind Bank (-20.46%), and HDFC Life (-10.00%).

India’s 10Y bond yield jumped +13.78% in 2022, and +12.90% in the last 3 years, closing around +7.35%. USD INR jumped +11.10% in 2022 and +15.13% in the last 3 years, closing around 82.60. Looking ahead, USDINR may further surge around 86.00-90.00 by Dec’23 if technically sustain over 83.50 and fundamentally if there is some divergence between Fed and RBI monetary tightening including QT.

Also, India’s macros including CAD and fiscal deficit may matter along with the forthcoming early 2024 general election. Normally USDINR appreciates ahead of any general election, favorable for unofficial election spending by various political parties. Higher USDINR is also positive for Nifty warnings as almost 60% of revenue comes from export. Also, the RBI/government wants an orderly appreciation of USDINR in line with the US dollar index, which is positive for India’s export growth (despite the domestic economy, inflation, and political issues).

The current sequential run rate of Nifty EPS (consolidated) growths is around 3.75%; i.e. annualized +15.00%. As per the current sequential run rate, FY23 EPS may come to around 931, and assuming +20% CAGR for FY: 24-26, the consolidated Nifty EPS may print around 1070-1284-1541. And assuming a median/average PE of 20, the average fair value of Nifty may be around 18600-21400-25700-30825 for FY: 23-26.

As the financial/stock market generally acts on expectations or discounts 1Y projected/forward EPS in advance, Nifty may scale around 21400-25700-30825 by Dec’23/Mar’24, Dec’24/Mar’25 and Dec’26/Mar’27. Further, if Fed/RBI indicates rate hike pauses after March/June’23 and Russia-Ukraine/NATO geopolitical tensions do not worsen further leading to WW-III (nuclear war) situation, then Nifty may scale around 20150-450 by Mar’23 also.

In Q4FY23/FY24, Nifty earnings may be boosted by higher commodity prices amid China reopening. Although a higher interest rate regime (bond yield curve steepening) is positive for banks & financials and negative for non-financials corporates to some extent, there may be also elevated retail NPA as most of the loans including mortgages are on a floating interest rate basis. And most of the big Indian corporates are now largely deleveraged or have the sufficient positive cash flow to service loans. In any way, both Fed and RBI may go for rate cuts in early 2024 if there are signs that inflation is steadily easing towards targets, Dalal Street and Wall Street will also flare up ahead of the respective general election on the expectations of lower borrowing costs.

India is a bright spot in a gloomy world and a favorite among EMs (except China) for global investment due to political and policy stability:

BRICS (Brazil, Russia, India, China, and South Africa) were all the rage in the early 2000s when EM investors hoped to capitalize on their economic growth and population expectations, as well as their sources of raw materials. Except for China, India now has the most political/policy and macro stability. Also growing political chaos in big Western democracies is causing policy paralysis and working advantageous for not only India but also China. India may become the world’s 3^rd largest economy by 2030 if policymakers can focus more on targeted fiscal stimulus/reform, capex, especially railway and EV to improve productivity. India has to also improve its innovation to compete with South Asian exporters and also some AEs.

India is now a major beneficiary of political/policy stability and the appeal of 5D (development, demand, demography, deregulation, and digitalization). There may be also some income tax-related fiscal stimulus (hike of minimum tax bracket to Rs.5L from present 2.5L and rejigs of other slabs), which may boost discretionary consumer spending to some extent.

But at the same time, India needs to control its huge population to improve GDP/per capita and growing unemployment (8.30% in Dec’22, higher than pre-COVID levels of 7.8%).

India is now around $3.4T economy, 5^th largest in the world (nominal GDP at current prices) along with a population of around 1.42B; i.e. GDP/Capita is only around $2395, at 20^th position in G20. Even with a projected $5T economy along with a 1.50B population by 2030, India’s GDP/Capita will be only around $3333 and should remain at the 20^th position in G20; China’s present GDP/Capita is now around $11500 compared to the U.S. around $6200, Singapore’s $66300, Indonesia $3950, South Africa $6000, Brazil $8700, Mexico $9600 and Russia $10000.

There is a need for political courage/wish for a big-bang reform like India’s population control. Although various BJP-ruled states are talking about it directly/indirectly like the ban of any government job or subsidy for any family above 2 children, the Indian Federal government led by PM Modi should make it a universal policy, without worrying about certain vote banks (as now BJP/Modi has virtually no credible political opponent/opposition at the national level).

Also, India’s goal of snatching the ‘world’s factory’ tag from China is being held back by the country’s inability to attract bigger container ships due to inadequate port infrastructure. Most harbors along India’s coast aren’t deep enough to handle bigger container ships. Despite India’s advantageous strategic location between the Suez Canal and the Strait of Malacca, port limitations mean it risks falling behind in the competition for a bigger slice of trade as productions/supply chains move away from China for various geopolitical reasons.

India also pays almost 45% of its tax revenue as interest on public debt and over 30% on salary & pensions for government employees. Although a huge pool of government employees is also providing robust consumer spending (discretionary) amid real wage growths and job stability and family pension security for a lifetime, India needs to control its sticky core inflation for relatively lower bond yield and lower borrowing costs for overall lower cost of living for the masses. Also, India needs to improve its innovation and productivity, which is the ultimate.

As India’s unemployment rate is now above pre-COVID levels around 8.30% and core inflation is still sticky around +6.00%, substantially above the +4.00% RBI target, RBI may further hike by +25 bps each in February and April for +6.75% repo rate. This will be also in line with the Fed’s probable +50 bps rate hike in February and March for a repo rate of +5.50% and will ensure USDINR policy/FX/bond yield differential. The U.S. also has average core inflation of around +6.00% against the EU and the U.K. of around +5.50%. ECB and BOE will also hike at a +50 bps pace in line with Fed for a balancing act (further synchronized tightening/hiking).

But there may be also a synchronized global pause in rate hiking after June’23 and RBI may also pause. By Dec’23, core CPI should also come down by around 1% on an average globally and locally. This will pave the way for Fed jawboning of rate cuts and even QE-5 from mid-2024 just ahead of the U.S. Presidential election in Nov’24. RBI will also follow Fed and both Wall Street and Dalal Street may begin to surge (discount) from early 2024 itself in hopes of Fed/RBI rate cuts.

India’s core inflation is now sticky around +6.00%, while unemployment remains around +7.50% on average, both substantially higher than the RBI target or potential run rate. Thus Indian government is dealing with the supply side, while RBI is with the demand side for equilibrium as price stability is the bedrock of any economy. Without perceived price stability, nothing works and discretionary consumer spending/real GDP growth is bound to falter.

Looking ahead, whatever may be the narrative, technically Nifty Future now has to sustain over 17900 for a rally towards 18225/18275-18335/18450-18515/18555 and further 18950/19025 in the coming days; otherwise sustaining below 17850-800, Nifty Future may further fall to 17680/17500-17350/17250 and 17075/16640 in the coming days depending upon Fed/RBI action, forthcoming report cards (earnings and guidance), overall macros and FY23 budget/nature of the fiscal stimulus ahead of G20 and early 2024 general election.

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