In this blog, we are going to discuss all the key highlights of Tata Mutual Fund’s Equity Outlook 2023 report. We are going to understand all the important financial events that shaped 2022 and how the economy and markets are going to perform as per the report.
If you don’t want to read the entire report, take a quick glance below to know all you the vital details from the report.
Keep an eye on this space for our upcoming series on #2023 Outlook for global and Indian markets and economy by India’s leading AMCs. Let’s start.
Outlook / Global Economy
👉Inflation remains a challenge to global economy
👉Monetary Policy direction clear:
- Bring down inflation
- Avoid a wage-price spiral
- Prevent hardening of inflation expectations
Outlook / India Corporate Earnings
👉Reduced earnings downgrade risk, potential of slight upgrades too.
👉Banks & Capital goods lead positive earning upgrade cycle.
👉Urban consumption has beyond “revenge buying”.
Outlook / India Corporate Earnings
👉Lower input costs / easing wage pressures could support sectors like IT, FMCG, etc.
👉Biggest risk: Global commodities & Crude price rise could lead to reduction in India’s valuation premium.
Outlook / India Drivers
Earnings in India could be driven by 👇
Tata Mutual Fund’s Portfolio Strategy
👉Balanced Portfolio Strategy to capture the economic cycle
👉Increase exposure in Mid & Small Caps Capitalise on broad-based economic recovery
👉Actively seeking GARP opportunities on bottom up basis; crucial in rising rates regime
Portfolio Strategy / GARP
Growth at a Reasonable Price opportunities
Outlook: Industrial / Capital goods
Tata Mutual Fund positive👍 on this, based on recovery in the investment cycle, led by healthy cash flows in the corp. sector + Govt’s counter-cyclical fiscal policy.
Tata Mutual Fund has increased exposure here👍, expecting strong earning momentum due to high credit growth, margin expansion, and lower NPAs. This includes mid and small-sized banks (trading at early cycle valuations)
Tata Mutual Fund is underweight on IT due to global uncertainty over the next 6 months🤷♀️ And now, Tata Mutual Fund’s analysis of Market performance in 2022.
Fate of Global Equity markets in 2022 decided on 2 wars:
2/ Central Banks’ war on Inflation
Global Markets Performance
But Q4-CY2022 brought relief:
👉Softening of rate hikes expected, with peak terminal rate likely by Jun-23
👉Growth revival likely due to
👉Lower inflationary pressures
👉China’s Covid-19 policy relaxations
👉a lower base
India Markets Performance 2022
Nifty 50 🔼 4.3%
Sensex 🔼 4.4%
– Easing of global macro headwinds
– Resilience of FPI equity flows
🏛Banking: Credit Growth, Margin Expansion and Lower Credit Costs: all 3 levers firing 👍
PSU Banks made the highest ➕ gains
👨💻IT: Biggest laggard. Suffered due to margin pressure + murmurs of global recession 👎
💊Pharma: Spent another year weathering the price pressures
Market Cap Performance
Large cap and Mid cap indices ended with positive gains 🔼…
…but Smallcap declined 🔻
👉FIIs: Net sellers of Indian equities in 2022, despite some reversal of the trend in recent months
👉Financial Services 💸 & Telecom📶 primarily held by FIIs. These could benefit from this slowdown of outflows.
Equity Flows – FIIs & DIIs
👉DIIs have picked up the FII selling momentum
👉DII ownership of Indian equities has grown to an all-time high of 14%+
Macro / GDP
India’s GDP grew 6.3% in Q2 FY23
13.5% in Q1 FY23
👉 Growth rate looks tapered due to the high base effect
👉Also affected by the slow-moving global economy + weak manufacturing growth
Macro / Inflation
👍Nov ’22 figures within RBI’s tolerance band
👍CPI inflation fell to 11-month low of 5.9% yoy in Nov’22
👍WPI eased to 5.85% YoY in Nov ’22, its lowest in 21 months
Macro / Currency
Aggressive rate hikes by US Fed -> USD appreciated against most currencies
₹🔻depreciated 10% against $ by CY22…
…but appreciated 1% against British Pound 💷
And 3% against Yen in 💴 in the current FY
Macros / FOREX Reserves
FX reserves came down 🔻 to $563 B (27 Dec 22) from $630 B (Apr 22)
Oil, coal, electronic items and Capital goods imports up…
…but exports have not kept pace.
BoP position of India is expected to be around 50 Billion USD negative.
Macro / Crude Oil
🛢Oil got pricier by ~10% in CY22 after witnessing a ~50% jump in CY21.
Crude prices to have a crucial impact on rupee volatility BoP
Prices are now more a function of geopolitics, than demand/supply
Macro / Interest Rates
RBI’s MPC focused to ensure inflation remains within the target, while supporting growth.
Macro / Trade Surplus – Deficit
👉Current Account Deficit at 10-year high likely in FY23
👉Trade deficit & CAD closely linked – periods of high trade deficit lead to high CAD in India
👉Sharp widening of the trade deficit in the current fiscal due to:
👉Slowing global demand
👉Elevated international commodity prices
👉Relatively resilient domestic demand
👉Monthly trade deficit from Apr to Nov averaged ~ USD 25 billion, notably higher than the monthly average of USD 16 billion for FY22.
👉India’s fiscal deficit was 13.17% of GDP in FY21, the worst in five decades.
👉Government may remain in consolidation mode for many years: Fiscal deficit 9.4% of GDP in FY22 and ~7.5% by FY26
👉Valuations have come off with earnings growing faster than the market caps but they are still high on an absolute basis.
👉Nifty 1y forward PE currently 23- 23.5x. This had declined to 20x few months ago.
Valuations: India vs Emerging Markets
👉MSCI India index (+8%) outperformed MSCI EM index (-20%) over last 12M. And by 187% over last 10Y
👉In P/E terms, the MSCI India index trading at a 139% premium to the MSCI EM index, above its historical average of 67%.
Valuations: Mid Cap
👉Headline valuations for Nifty Midcap 100 suggest we are in an acceptable zone, a platform for the broader markets to continue to do better.
That was a quick glance at Tata Mutual Fund’s Equity outlook.
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