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India’s underperformance in 2023, so far, is striking. As on April 17th Nifty has delivered – 2.6 percent returns YTD while S & P 500 is up by 8 percent and Euro Stoxx 50 is up by 13 percent YTD. Kospi and Shanghai Indexes are up by 15.6 percent and 9 percent respectively. This is big underperformance. 

It is important to ask: “why this underperformance?”

India outperformed most markets – developed and emerging – in 2022. Despite the massive selling by FIIs in 2022 Indian market displayed remarkable resilience, thanks to the sustained buying by retail investors and DIIs. But during the last several months, the number of active retail clients and active retail participation have been steadily declining. Many newbies who entered the market during the one-way rally post-Covid, have left the market. In this context, when FIIs pressed selling on a sustained basis, markets corrected. In 2022 active retail clients and DIIs were completely absorbing the FII selling. This has changed in 2023. FIIs were rational in selling in India since the premium on Indian valuations had become unsustainable and the Chinese reopening and cheap valuations in South Korea, Hong Kong and Taiwan opened opportunities for FIIs to sell in India and buy in these relatively cheaper markets.

This phase appears to have ended. FIIs have turned buyers in April. DII investment continues to be healthy and monthly SIPs have crossed Rs 14000 crores. April has started well for equity markets with Nifty steadily rising by more than 4 percent from the March lows. There is a short-term rally underway assisted by FII buying. FIIs are back into buying mode since valuations have corrected from elevated levels. The time correction in the market during the last 18 months and the improvement in earnings have combined to make valuations reasonable and in tune with the long-term average. FY 23 is likely to end with Nifty EPS of around 820, registering growth of around 12 to 14 percent. The fact that this growth has been achieved on top of a 35 percent growth in earnings in FY22 is commendable achievement. As things stand today, low teen growth in earnings in FY 24 appear achievable. So, with Nifty EPS of, say, 970 for FY24, valuations are reasonable now. FIIs cannot ignore the fact that India has the best growth and earnings story for many years to come. The significant improvement in India’s CAD and the expected weakness in dollar is contributing to the strength in INR. This can facilitate increasing FPI inflows.

The MPC sprang a surprise on April 6th when it decided to pause, that too unanimously, rather than hike by 25bp, which was the market expectation. To dispel any criticism of laxity in inflation management, the RBI Governor cautioned that ‘this is a pause, not a pivot. ‘The MPC’s inflation target of 5.2 percent and GDP growth target of 6.5 percent for FY24 appear a bit too ambitious now. But, if these targets can be achieved, that would be a big feat in the present difficult economic environment. Leading indicators like credit growth, power consumption and tax collections reflect a resilient economy. This augurs well for the market, going forward.

The Fed’s hawkish monetary stance and high US interest rates coupled with possibility of imminent recession in the US will keep global equity markets subdued in the short-term. Investors can use this period of weakness to accumulate high conviction winners for attractive wealth creation in the long run.

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