Rational investors can endure this topsy turvy market

We continue to hold the view that the market may trade in a channel with a negative bias. To buy on dips and reduce the position at a higher range will be a good strategy for short-term investors. While for long-term investors, owning a balanced portfolio with a focus on value stocks should be the investment strategy. In the coming days, the market will focus on Q4 results and its reflection on future profitability. The cost of inputs is rising due to high inflation, leading to an increased downgrade in earnings forecast. The trajectory of inflation will be a key factor for future trend. High inflation due to war and cut in supply is a major concern. The medium-term view is that pricing will reduce during the year as capacities and transportation open and covid restrictions are removed. If so, it will be a good relief for the Indian economy being a heavy importer of commodities; or else it will be a challenge.

RBI policy is a laggard to economic changes
It is understandable that RBI has been supporting the economy with a loose monetary policy. However, it is a setback to notice that the policy was biased towards the best-case scenario despite a slowdown in the world economy and rise in inflation. In the recent monetary policy meeting, inflation estimate has been sharply increased to 5.7% from 4.5%. Similarly, GDP growth forecast for FY23 was slashed to 7.2% from 7.8%. The market expects about two to four rate hikes in FY23 with a change in policy stance to neutral from accommodative. This view is moderate due to the accommodative RBI stance with hope of a reduction in future inflation.

We presume that the implication of this hawkish view and changes will be neutral for the corporates because nominal GDP growth is expected to be healthy at 12% to 13% and strong liquidity will be maintained. Now, inflation is high, but it is expected to moderate in the future as the global supply chain improves, which is down since the pandemic. It will be a big boom for the Indian economy which is experiencing strong growth in exports and FDI inflows. Many segments especially financials will benefit the most from the rising interest rate cycle. In the shortterm, an increase in reverse repo can have a negative effect which will be adjusted by increasing lending costs to customers with some lag effect.

Q4 results a mixed bag
Q4 result preview is blended as revenue growth is forecasted to be high due to inflation and constant rise of product prices while bottom-line growth is mixed. There are pockets that are benefiting from price and volume growth while some companies have seen a fall in volume and profitability. The best performers are likely to be the financial sector due to strong credit growth, metals due to price hike and pharma, chemical and auto due to base effect and volume growth. Weak performance is forecasted for cement, infra, FMCG and oil marketing due to increased input costs. Outlook and commentary by the management will be very important since market valuation is high, and near-term inflation is rising.

The initial Q4 result of IT sector is negative and below the market expectation while that of banks are mixed. Outlook for the banking sector is robust due to rapid credit growth, improvement in balance sheet and fair valuation while it is mixed for the IT sector due to seasonal weakness and premium valuation.

Our short-term view of the market
In the last five months, the Indian market was trading in a channel with a negative bias. In first week of April, we were at the upper band of that sliding channel. The domestic market made the recent low on 8th March and high on 5th April, in less than a month, giving a return of 15%. This rally was initiated in anticipation of an easing in risks associated with the war, as talks between Russia and Ukraine were set to start. Commodity prices started to fall and FII selling reduced. Fed gave an in-line policy decision, improving inflow to emerging markets. And lately, the biggest ever merger in India between HDFC Bank and HDFC Ltd was proposed.

After this good performance, we can expect the market trend to undermine in the short-term. We have a constructive view of the market because the broad market is attractive in the short to medium-term. But investors will have to be cautious and make stock and sector specific investments since the main indices are trading at the upper band and the downside risk to future earnings growth is rising due to high inflation. We prefer value stocks because elevated valuations of main indices may not be sustainable in the long-term. The performance of growth stocks trading at supreme valuations may get disrupted. However, the broad market has consolidated during the last five to six months, improving the valuation of mid and small caps, providing opportunities on stock and sector basis.

Opportunity in consumption sector
In the near-term, the prospects of consumption segments like FMCG, discretionary, staples, durables and retail sectors are cautious due to high input costs and moderation in future demand. High inflation and product price hike can provide decent revenue growth in the short-term. However, volume growth will be muted, and margins will be on a downward trend due to the delay in the passthrough of input costs like food, copper, plastic, packaging, and logistic.

However, in the consumer durable space, companies with a high mix of fans and air conditioners will see decent growth, as Q4FY22 and Q1FY23 are historically the best quarters for these summer products. Indices like Nifty Consumption and Nifty FMCG which were on the downside trend bounced back in March and April after the deep correction. Any further correction during the coming period will be an opportunity if inflation normalizes in the next two quarters

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