Answer : We are witnessing a convergence in valuations and earnings. Interest rates are normalizing back to pre-covid levels. This is having a contractionary impact on equity valuations. Nifty Price to earnings multiple has contracted by 200bps with ~100bps rise in corporate bond yields. At the same time, earnings are growing steadily. There is a bit of loss of momentum in Nifty EPS growth from FY21 to FY22 and FY23 numbers are likely to see an earnings growth of 14% to 15%. At FY23 PE of 19 times, Nifty looks slightly above average in terms of valuations. Expect this convergence, i.e. contraction in valuation multiples and steadiness in earnings, to continue. We don't see many reasons to worry. But there is certainly more reasons to be selective and bottoms up focussed with many sectors beginning to recover from pandemic disruptions.
Answer : We are already witnessing signs of raw material price increase eating into margins. Commentary from consumer staples sector is one of caution due to slower volumes, rising input costs and margin pressures due to downtrading. This impact was beginning to become more pronounced after the geopolitical conflict began in Feb 2022. We expect this to play out over the next 2 to 3 quarters. Most of these stocks are reflecting these expectations in their performance.
Answer : Indian remains vulnerable to high crude oil prices. As per our estimates if Oil continues to remain in the range of $100 to $110, India will scrape through with minor adjustments. But if Oil prices were to remain high for an extended period, say 2 or more quarters above $125, India is likely to see more inflationary pressure and higher deficits on the current account. Indian economy is witnessing a steady recovery for now and remains much more resilient that most large economies. Our base case remains a stronger economic recovery with steadier markets in the second half. Bouts of volatility are likely to continue.
Answer : Firstly, the Emerging Markets basket has seen a substantial selling from FIIs. India being part of this basket with ~9% weight gets its fair share of outflows which are commensurate with the EM basket. Secondly, the earnings growth in India has slowed versus the last two financial years, FIIs usually follow the earnings cycle. In addition to these points India was trading at a record premium to its EM peers which also led to some reduction in India weightage in some active funds. However, the reasons for FIIs to sell now are lesser and it's possible that the majority of FII selling is behind us.
Answer : FY23 is likely to be a year of consolidation with select businesses likely to do well. US Fed rates hikes, RBI monetary policy rationalization, Inflation headwinds and geopolitics are all the short-term worries on markets mind. Most of them are likely to provide bouts of volatility. As investors we feel these worries provide a fertile ground to pick quality stocks this year.
Answer : Use this year to build a high-quality portfolio of funds which are focussed on buying strong business franchise. Keep investing with discipline.