Monthly Equity Market Outlook and Analysis: Shibani Kurian

There is never a dull moment in equity markets, and May was no exception to this rule. 

Equity Market Movement in May 2023:

1. The large-cap nifty index has moved up by over 3%, while the midcap and small-cap indices outperformed the nifty index during the month.
2. While equity markets moved up during the month, Indian equities, which outperformed emerging markets in 2022, have underperformed its emerging markets peers so far in 2023 in USD terms. 
3. The month also witnessed foreign institutional investors turn net buyers, pumping in investments worth USD 4.2 billion as of May 29, 2023. 
4. While domestic institutional investors were marginally net sellers, however, they remained net buyers to the tune of USD 10.3 billion so far this year. 

Will the world face a recession?

The probability of recession in the developed countries remains high. US CPI Inflation has eased, but the core inflation remains sticky, and the US Federal Reserve is walking a tightrope trying to maintain a balance between slowing growth and sticky core inflation, given that the labour markets in the US remain tight. 

What is the situation on the domestic front?

1. Indian economy is placed better globally in terms of most macroeconomic parameters, including growth, inflation and monetary policy. 
2. GST collections at over Rs 1.50 trillion appears to be 'The New Normal'.
3. A shrinking current account deficit led by improving terms of trade and rising forex reserves has reduced the vulnerabilities in the external sector. 
4. Amid the banking crisis in US and Europe, the Indian banking system remains on a strong footing. 
5. Indian banks are well-capitalised, with capital adequacy ratios in excess of regulatory requirements, and have healthy balance sheets. 

The outlook on monsoon:

El Nino risks are rising, with IMD maintaining its forecast on May 26, 2023, that rainfall is expected to be normal. However, the monsoons are expected to have a weak start, with below-normal rains in June.

The impact of monsoons depends not only on the quantum but also on the spatial distribution of rains. The steady gain in irrigation and infrastructure development can help during bad years in agricultural regions.  

The trends in corporate earnings: 

Nearly 48 listed companies on Nifty 50 have reported earnings for the quarter ending March 2023.  

Earnings have been largely in line with estimates at a headline level, with Nifty companies reporting 13% year-on-year revenue growth and PAT growth of 15.7% year-on-year. 

Most companies' margins have started improving sequentially, with commodity costs having corrected sharply. 

Much of the earnings growth has been driven by domestic sectors such as banking and automobiles, while metals have been a drag. 

Consequently, earnings estimates for Nifty companies for FY’24 have not seen many cuts over the past few months. FY'24 consensus earnings expectations remain in the mid to high teens range. We would need to, however, watch out for earnings revision at a broader market level, where there will likely be wider dispersion between stock and sectors in terms of earnings. Therefore, it's important to look at stocks in sectors where earnings visibility is clear, or growth potential is evident.

Kotak Mutual Fund's view: 

• We recommend staying neutral to equities in the asset allocation basket.
• It is a buy on the dips market. Investors should use correction as an opportunity to increase allocation to equity. 
• We continue to be marginally overweight on large-cap stocks and marginally underweight on mid and small-cap securities.
• From a bottom-up perspective, we are focusing on quality names which have corrected meaningfully where growth expectations have not waned, and earnings visibility is definitely there.  
• We have been positive on many domestic-oriented businesses, with the banking sector as one of the top sectors across our portfolios. 
• We are also positive on industrials, capital goods, auto, and cement, among others. 
• We are cautious of global-facing sectors such as metals and IT. 

In conclusion, we encourage investors to continue with a disciplined approach to investing, focusing on long-term goals and asset allocation strategies. 

Stay safe, and stay invested. 

(The author is Senior Executive Vice President, Fund Management –Equity, Kotak Asset Management Co Ltd). 

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