A near-term concern in the market now is the high valuation in India. With Nifty trading at around 22 times FY23 earnings and the market cap to GDP at 107 percent, it can be argued that the market is over-valued. But the economic logic behind the over-valuation is India’s superior economic growth and earnings potential.
The major concern in stock markets, globally, is the ongoing growth slowdown in the global economy. It is known, and discounted by the market, that global growth will be much lower in 2023 compared to 2022. But how steep the decline would be is not known and therefore, not discounted completely. There are too many unknowns like the trajectory of US inflation and interest rates and the course of the Ukraine war.
Recession fears in major economies
Of the three pillars of the global economy – USA, Euro Zone and China – Euro Zone is on the verge of recession. China, plagued by the deepening property market crisis, is slowing down drastically. What is not known is the degree of slowdown in the US economy. Markets have discounted a short and shallow recession in the US, but not a prolonged and deep recession. It is this unknown US growth factor that will mainly determine the trends in global stock markets in 2023.
Whatever might be the degree of slowdown in the global economy, the consensus is that India would outperform among the large economies. Take a look at the growth projections by the IMF for the major economies of the world in 2022 and 2023.
Global growth is projected to decline to 2.7 percent in 2023. There is a 25 percent possibility of global growth dipping below 2 percent. Half of the Euro Zone countries are likely to slip into recession in 2023. India is now the fastest growing large economy in the world and is projected to be the fastest growing large economy in 2023, too, even in a slowing global economy. India stands out among the BRICS countries with growth rates much ahead of the rest.
Amidst the impressive growth, a concern in India has been the rising Current Account Deficit currently running at around 3 percent of GDP. Fortunately, now with Brent crude declining to below $90, the concerns on the CAD front are easing. The decline in metal prices is another positive and this can contribute to the declining trend in inflation.
US inflation and interest rates hold the key
The direction of the market in 2023 is likely to be largely determined by the inflation trend in US and the Fed’s policy response. If the current declining trend in US inflation sustains and the Fed pauses after a 50 bp rate hike in December, the dollar index and US bond yields will decline sharply. This can trigger a rally in stock markets globally, led by the US. In spite of high valuations India too will rally. On the other hand, if high inflation persists in US and the Fed tightening takes the terminal Fed funds rate above 5 percent, that will be negative for markets. Anyway, high volatility is in store for markets.
Focus on the quality of business and buy and hold
Investors can utilise weakness in the market to buy high quality stocks in the fundamentally strong segments (See the editorial). When times are uncertain and valuations are high, the safe strategy is to focus on the quality of business. High quality stocks in promising sectors will always rebound after market corrections. Adopting a ‘Buy and Hold’ strategy focussing on quality is a sure recipe for investment success.
Read more articles by Dr. V.K. Vijayakumar, Chief Investment Strategist, Geojit