Nifty closed almost flat in FY23 on subdued global cues, macro headwinds, and tepid earnings

At FY24 projected EPS around 956*20 (average PE), Nifty may scale around 18900-19100 by Mar’24

India’s benchmark stock index Nifty closed around 17117.70 Wednesday (29^th March 23), almost flat in FY23 amid subdued global cues, macro headwinds, and tepid earnings growths. The Nifty consolidated EPS is growing by around +2.25% on an average sequentially; i.e. annualized +9.00% against average core inflation of around +6% and nominal GDP (at current prices) GDP growths around +10%.

Nifty earnings were affected locally by higher borrowing costs, higher inflation/cost of living, elevated unemployment/under-employment, the continuing fight against all types of black money/corruptions, and resultant tepid discretionary consumer demand coupled with subdued external trade (amid global macro headwinds and Russia-Ukraine/NATO geopolitical tensions and lingering economic sanctions). Also, China’s ZERO COVID policy for most of the year has affected metal and other commodity prices and earnings of related Indian producers.

At the current sequential average run rate, the FY23 consolidated EPS should come to around 869; i.e. a meager growth of around +7.40% from FY22 EPS of around 809. The Q3FY23 Nifty EPS was around 850 vs 832 sequentially (+2.16%) and 778 yearly (+9.25%). The current TTM PE of Nifty is around 20, at average fair value. In 9MFY23, Nifty earnings were boosted by banks & financials (higher bond yield/interest rate positive for bank’s NIM), IT/techs (higher USDINR positive for service export despite synchronized economic slowdown on both sides of Atlantic) while dragged by commodity producers, consumer goods & services and other interest rate sensitive sectors.

Looking ahead, Nifty EPS may grow by around +10% in FY24, to 956 in line with nominal GDP growth. And assuming an average PE of 20, Nifty may scale 18900-19120 by Mar’24.

In FY24, although the Indian economy is expected to get a boost from higher infra-capex/government spending, core inflation may remain elevated and sticky around +6%. Although RBI may pause after 1-2 more hikes in May-June’23, there will be no rate cuts at least till Dec’23 (in line with Fed). So, there will be an impact of higher borrowing costs also in FY24 on the overall economy, leading to lower demand and lower corporate profits. Although, in India, corporates have adequate pricing power, there is also a limitation as consumer demand is tepid.

As of now, there are no signs of significant cooling of synchronized global inflation and also any resolution of the Russia-Ukraine/NATO war. Although Chinese reopening is positive for the overall global economy, subdued consumer demand from Europe/U.S. and also other parts of the world may limit the growth engine of the world’s 2^nd largest economy.

As the immediate concern of financial stability eases, both Fed and ECB may go for their planned rate hikes in a calibrated manner to ensure price and financial stability as well as credibility. Fed may go for calibrated +25 bps rate hike on 3^rd May, and may also be 14^th June for a terminal rate of 5.25-5.50% and then pause. Both Fed and ECB will ensure financial stability with liquidity tools and price stability with interest tools as unlike during 2008-10, core inflation is still substantially higher than the +2% targets. In a way, now May hike of +25 bps is almost certain for both Fed and ECB, while there is a question mark for June.

India’s RBI may also hike +0.25% on 6^th April and further +0.25% in June (if Fed goes for a June hike after May) for a terminal rate of 7.00% against the Fed’s expected 5.50%. India’s core CPI continues to be sticky around +6.00% and thus RBI wants to ensure a real positive rate, by around +100 bps (restrictive levels) wrt at least average core inflation. Thus RBI will continue to tighten to keep interest rate/bond yield differential and also USDINR under control, which will also control imported inflation and manage overall price stability. RBI has to tighten in a calibrated way to bring inflation down by curtailing demand; i.e. slowing down the economy to some extent without causing an all-out recession for a safe and soft landing.

On 17^th March, RBI Governor Das said in a prepared speech at a G20 event:

·         Despite the multiple and overlapping shocks to the global economy from the COVID-19 pandemic, the war in Ukraine, and synchronized monetary policy tightening by Central Banks across the world, the Indian economy remains resilient and is expected to be the fastest-growing major economy in the world.

·         Our financial sector remains stable; the worst of inflation is behind us; and the Indian Rupee has exhibited the least volatility among its peer currencies.

·         India has assumed the leadership of G20 in an environment of formidable geo-economic shifts which have vitiated the global macro-financial outlook. The capacity of the existing global economic order to manage the severe impact of multiple shocks is under challenge. This has led to severe supply-demand imbalances in critical sectors and given rise to high inflation in almost all countries.

·         Globalization of inflation to multi-decadal high levels and subdued global growth and trade has posed complex policy challenges.

·         Post-COVID, the world economy was recovering gradually on the back of large policy stimulus and the rising pace of vaccination when the war in Ukraine led to sharp increases in global food, energy, and commodity prices. It also triggered renewed supply chain disruptions. Geopolitics has now been taken over by geo-economics.

·         According to the IMF, the global economy is now experiencing a process of geo-economic fragmentation, operating through five key channels – trade, technology, capital flows, labor mobility, and global governance.

·         There are rising restrictions on trade and diffusion of technology, barriers to labor migration, reduced capital flows, and increased uncertainty about global public goods. The interlinkage between geopolitics and the economic prospects of nations has become stronger, with each influencing the other.

·         There is now a growing trend of friend-shoring and onshoring. The focus is now on ensuring food and energy security and on securing strategic minerals – lithium, rare earth, copper, zinc, chromium, graphite, etc. which are required for producing batteries, solar panels, and wind turbines.

·         Actually, the backlash against globalization had started even before the pandemic struck, as globalization created both winners and losers. The international order could not provide cooperative solutions to make the process a win-win for all. This indeed is the biggest challenge for G20 as a multilateral group. Globalization must produce better and more equitable outcomes for all, including the global south.

·         Of the multiple risks facing the world community, the surge in inflation has posed a complex monetary policy dilemma in every economy between raising interest rates enough to tame inflation, and at the same time minimizing the growth sacrifice to avoid a hard landing.

·         The aggressive monetary policy tightening by systemic central banks since early 2022 and the consequent appreciation of the US Dollar has led to several economies, with a high share of external debt, becoming highly vulnerable to debt distress.

·         According to the IMF, 15 percent of Low-Income Countries (LICs) are estimated to be already in debt distress, with an additional 45 percent at high risk of debt distress. About 25 percent of Emerging Market Economies (EMEs) are also at high risk.

·         Further, capital outflows from Emerging markets and Developing Economies (EMDEs) due to continued tightening of financial conditions have led to reserve losses, sharp currency depreciations, and spiraling imported inflation pressures.

·         In such a situation, addressing the deteriorating debt situation in low and middle-income countries and facilitating coordinated debt treatment by official bilateral and private creditors under a multilateral framework has assumed priority under our G20 presidency.

·         Despite the overwhelming concerns a few months back about an imminent recession, the global economy has in fact exhibited greater resilience, reducing the probability of a hard landing. Nonetheless, there is a trend decline in global growth.

·         There is also considerable uncertainty about structural shifts taking place in the drivers of inflation, ranging from labor market dynamics to concentration of market power and less efficient supply chains.

·         In parallel, global food, energy, and other commodity prices have softened from respective peaks and the supply chains are normalizing, which should help in achieving disinflation. Restoration of a more balanced world economic order is, therefore, at the forefront of the G20 discussions. India has stressed the importance of creating an inclusive agenda to restore stability and confidence in multilateralism while revitalizing global growth.

·         As I proceed to conclude, let me state that recent developments in the US banking system have brought to the fore the criticality of banking sector regulation and supervision. These are areas that have a significant impact on preserving the financial stability of every country. More specifically, these developments in the US drive home the importance of ensuring prudent asset liability management, robust risk management and sustainable growth in liabilities and assets; undertaking periodic stress tests; and building up capital buffers for any unanticipated future stress.

·         They also bring out that cryptocurrencies/assets or the like can be a real danger to banks, whether directly or indirectly. The Reserve Bank has taken the necessary steps in all these areas.

·         The regulation and supervision of the financial sector and the regulated entities have been suitably strengthened. The regulatory steps include, among other things, the implementation of leverage ratio (June 2019), large exposures framework (June 2019), guidelines on governance in commercial banks (April 2021), guidelines on the securitization of standard assets (September 2021), scale-based regulatory (SBR) framework for NBFCs (October 2021), the revised regulatory framework for microfinance (April 2022), Revised regulatory framework (July 2022) for Urban Cooperative Banks (UCBs) and guidelines on digital lending (September 2022).

·         Simultaneously, RBI’s supervisory systems have been strengthened significantly in recent years through measures that include a unified and harmonized supervisory approach for Commercial Banks, NBFCs, and UCBs. The frequency and intensity of on-site supervisory engagement are now based on the size as well as riskiness of the institutions. Off-site supervision has also become more intense and frequent. We have strengthened our engagement with the Senior Management and Boards of the Supervised Entities.

·         The focus is now more on identifying the root cause of vulnerabilities, rather than dealing with the symptoms alone.

·         We have also issued revised guidelines on the oversight and assurance functions of financial entities. The use of advanced data analytics is supplementing our supervisory process.

·         To strengthen cyber resilience, a comprehensive cyber security framework for banks together with Digital Payment Security Control Guidelines has been issued. We have also established the college of Supervisors and augmented the staff strength significantly in recent years. What we have in India today is a well-regulated and well-supervised banking sector. The same would apply to the NBFCs sector and other financial entities under RBI’s domain.

·         India has assumed the G20 presidency at a time when it has once again emerged as the fastest-growing major economy in the world. International confidence in India’s capacity to contribute constructively to reshape the global economic order is rising. The risk of a hard landing has dissipated the world over, even as the pace of disinflation remains less than desirable.

Overall, RBI Governor Das blamed higher inflation on geopolitical tensions and economic sanctions, which need to be properly resolved for stability in global macros. As a Central Bank, RBI’s job is to hike rates well into the restrictive zone to curtail demand, so that it can match with currently constrained supply, resulting in lower inflation. RBI as-well-as Fed has done their jobs almost fully and may hike once/twice more in May/June and a long pause thereof at least till Dec’23 before any plan to cut (if core inflation indeed goes down towards target zones).

Das also pointed out Indian banking system/sector is now quite resilient after years of consolidation, various regulatory reforms, and also elevated NIM/NII regime; banks are now flush with excess capital buffer to avoid any U.S. types of small bank failure even in extreme stress conditions, be it for NPA or HTM/MTM bond portfolio loss.

Looking ahead, whatever may be the narrative, technically SGX Nifty Future now has to sustain over 17000 for a rebound to 17300/350-500/700-775/900-18100/375 in the coming days; otherwise sustaining below 16950, Nifty Future may further fall towards 16850/650-15795/525* and further 15000/14450-13500/12950 in the worst case scenario (another 2008 type GFC; but that’s highly unlikely now as global central banks/government will now not allow that to happen in the first place).

Articles

Comments