Equity markets not out of woods, but there's light at the end of tunnel

Indian markets are expected to fare better in Samvat 2079 after a year of consolidation. Equity strategists believe the domestic markets could deliver low double-digit or high-teen returns, depending on how the global environment and risk appetite shape up.

Equity markets are not entirely out of the woods, with fears of global recession looming large, central banks maintaining their hardline approach when it comes to reining in inflation, and geopolitical tensions remaining on the boil.

However, experts believe most of the risks could ease in the latter part of the year when inflation will be more benign, central banks will once again start easing monetary policy, and the economic and earnings growth will get back on track.

“Samvat 2079 is likely to be just like Diwali — there will be celebration but with loud bursting of crackers. A disciplined investor who can buy on dips will make money. A momentum investor will have a tough time managing volatility,” says Nilesh Shah, group president and managing director, Kotak Mahindra Mutual Fund.

He expects banks, capital goods, and the manufacturing sectors to outperform in Samvat 2079.

The benchmark Nifty ended Samvat 2078 at 17,576. The Sensex finished at 59,307, logging marginally negative returns.

Some analysts expect the markets to remain in trading range and consolidate for some more time until key headwinds ease.

“In the near term, higher crude, sluggish global growth, along with a depreciating currency, could create a downward spiral of macro risks — ballooning current account deficit (CAD) and overshooting fiscal deficit… If crude and currency risks play out, they could deteriorate India’s macro and we see risks to the capital expenditure upcycle thesis. Given this, we believe further earnings cuts cannot be ruled out,” said BofA strategists, led by Amish Shah, in a recent note.

“We cut our Nifty trading range to 16,500-18,500 (from 17,000-19,500 earlier) and lower our base target to 17,500 (from 18,500 earlier),” they said.

Experts observe the resilience of the domestic economy and corporate earnings in the event of a global slowdown to determine market trajectory.

“Once central banks stop raising rates, investors will be looking at where growth could possibly spring from. That’s where emerging markets, including India, will stand out. I would expect the Nifty to give 10-12 per cent returns. There will be sectors and companies that will do better. Geopolitical tensions are likely to be the biggest headwinds. One has to see how the Russia-Ukraine conflict evolves. China-Taiwan might become another headline point,” says Andrew Holland, chief executive officer, Avendus Capital Alternate Strategies.

In Samvat 2078, domestic markets outperformed most global peers by virtue of a strong domestic liquidity. Domestic flows will be crucial, particularly if global headwinds persist and foreign portfolio investors (FPIs) continue to take money off the table. Experts believe FPI flows into domestic markets will improve once the currency markets stabilise.

“The rate cycle will start slowing from the early part of next year and it will probably end in the middle of next year. By the end of the next calendar year, we will start looking at cuts in rates as well. We are probably going to see a recession in the US and Europe and consequently there will be an earnings slowdown. Once the strength of the dollar peaks, we will see improvement in flows into emerging markets. The key headwind to watch out for will be any change in oil prices. We have seen our CAD go up and foreign reserves come down,” said Jyotivardhan Jaipuria, founder, Valentis Advisors.