Weak sentiment

Stock markets are adjusting to new realities

Calendar 2023 so far has seen volatile markets and a sequence of unusual market-related events. Investors are turning increasingly cautious because of rising interest rates, high inflation, and projections of slower growth. In nominal terms, the benchmark Nifty has given a positive return over the last 12 months, but it has seen steady erosion in valuations. There has been sustained selling by foreign portfolio investors (FPIs). Domestic investors (both institutional and retail) have been net buyers, but there are signs that retail investors are now seeking alternative investment avenues. In 2021-22 and 2022-23 (till February 28) FPIs have been net sellers to the tune of Rs 1.4 trillion and Rs 50,210 crore, respectively. Domestic investors have balanced this outflow through commensurate buying, and the Nifty is up 3.9 per cent in rupee terms in the last 12 months. But this is lower than the inflation rate and, given the currency weakness, dollar returns are negative. 

The current price-to-earnings ratio of the Nifty is higher than desirable at 20.7, but it has fallen from peak levels of 40 in 2021. As a result, valuations are no longer at a huge premium to other emerging markets. Given that India is slated to grow faster than its peers, the valuation premium may look reasonable to some investors. However, poor sentiment has had a severely negative impact, particularly on the primary market, which has been exacerbated by the Hindenburg report. The Hindenburg report and the consequent withdrawal of the Adani follow-on public offer did make headlines, but the primary market looked weak even before that. There hasn’t been a single primary issue in calendar 2023, with several companies pulling out of planned issues in January and February, citing weak sentiment. Mirroring this, the start-up ecosystem has also seen pullbacks. 

All the listed stocks of the Adani group have undergone deep corrections and the regulator has started to investigate multiple allegations against the group. If this incident does result in tighter corporate governance, it would be a blessing in disguise in the long term. However, it undoubtedly has a negative short-term impact. Data suggests retail investors have cut back direct stock market exposures considerably, although individuals are still investing through the mutual fund route. There are some signs that household savings are now flowing into fixed deposits, which are offering higher nominal returns, instead of stocks.

The latest gross domestic product data indicates private consumption has weakened. While the Union Budget had a strong thrust towards infrastructure creation and that could generate employment, there wasn’t much to directly encourage private consumption. Stock market flows indicate that investors are also shifting their attention to adjust to this possibility. Construction, heavy engineering, capital goods, cement and steel — sectors which will be driven by the Budget — are seeing positive interest, but consumption plays such as fast-moving consumer goods and automobiles are seeing corrections. The IT sector, which is normally considered a strong hedge for currency weakness, has also seen selling due to the global slowdown. There are multiple initial public offerings scheduled for the next 4-6 weeks and it remains to be seen if these issues go through. This would end the primary market drought. However, broader market valuations could correct until a new equilibrium that adequately discounts higher interest rates is reached.