 "Markets flat after volatile year; benchmarks swing over 20% in FY23")
After stellar returns in the preceding two financial years, the equity markets took a breather in FY23, with the benchmark Sensex and Nifty50 indices finishing nearly flat.
Sustained rate hikes by global central banks, the Russia-Ukraine war, stubborn inflation, and the banking crisis in the developed world banking kept a leash on stock price performance in the outgoing financial year.
The Sensex finished FY23 at 58,991, with a net gain of just 0.7 per cent or 423 points. The Nifty 50 index ended at 17,360, down 0.6 per cent, or 105 points, over the previous FY’s close.
The markets witnessed intense volatility during the year, with the Nifty recording its all-time high of 18,812 on December 1 and a low of 15,293 on July 17. Likewise, the Sensex moved in a wide range between 50,921 and 63,583. While the Nifty Midcap 100 managed to eke out marginal gains, the Nifty Smallcap 100 declined nearly 15 per cent during the year, indicating pressure on the broader market. In FY23, central banks across the developed world were forced to prioritise managing price rises even at the cost of economic growth as inflation hit multi-year highs.
The unwinding of post-pandemic stimulus measures and the hike in interest rates kept investors constantly on tenterhooks. Global headwinds led to sustained selling by foreign portfolio investors (FPIs), who pulled out Rs 38,377 crore from the Indian equity market.
The unprecedented sell-off in Adani group stocks triggered by scathing allegations by US-based short seller Hindenburg Research was another highlight. The market value of the 10 Adani group listed stocks dropped as much as Rs 12 trillion ($150 billion) less than a month after the report on January 24. The rout had little bearing on the overall market but pulled down India’s standing on the world market cap league table. During the year, India for the first time broke into the top five but later dropped to number 7. Further, its market cap slipped below $ 3 trillion once in June 2022 and again earlier this month, according to Bloomberg data.
“The issues in the Adani group had a modest role to play in the increased volatility in the outgoing financial year. The rest was contributed by factors like interest rates and geopolitical tensions,” observed U R Bhat, co-founder of Alphaniti Fintech.
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Despite meager returns, India remained one of the best-performing major markets in the world for most of the year. However, other world markets played catch up in last quarter. Yet India managed to beat the MSCI Emerging Markets index, which declined 14.2 per cent, and MSCI World index, which fell 10.3 per cent in FY23.
Strong domestic liquidity once again helped cushion the Indian markets. Domestic institutional investors (DIIs) bought shares worth Rs 1.7 trillion in FY23. Flows from retail investors, who invested directly in stocks, further helped equities. However, sustained volatility led to a drop in retail participation during the March 2023 quarter (Q4FY23). According to experts, if the markets continue to wobble, domestic flows may weaken going ahead, especially given the attractive yields offered by the bond market.
“We cannot just depend on domestic flows. They are limited; the markets post good returns only when FPI flows come. Domestic investors can at the best mitigate the losses. We cannot expect robust domestic flows for the third year in a row,” said Chokkalingam G, co-founder, Equinomics.
Bhat said: “Domestic flows should continue unless there is some double-digit correction in the markets.”
Among Nifty components, safe-haven FMCG stocks emerged as the best performers led by ITC. On the other hand, IT stocks were among the worst performers, weighed down by global uncertainty. For the financial year 2023-24, analysts are expecting modest returns given the uncertain environment.
In a note earlier this month, BofA Securities cut its Nifty December 2023 target from 19,500 to 18,000, citing downward pressure on earnings growth estimates.
“Our US economics team believes the Fed will continue to hike rates (5.25-5.5 per cent terminal rate by June 2023), despite the recent credit events in the US. This could continue to weigh on the US & Indian equity markets. After 6 per cent year-to-date correction, the Niſty's valuation is close to its long-term average but is still overvalued versus EMs. A further 6 per cent correction in the Nifty would make it attractive for 'buying the dip',” it said on March 20, when the Nifty closed at 16,988.