Market Outlook – February 2023

“Courage taught me no matter how bad a crisis gets … any sound investment will eventually pay off.” — Carlos Slim Helu (Mexican business magnate, investor, and philanthropist)

Markets continued its January Jinx and ended lower for 2nd consecutive month in a row. The Nifty ended 2.4% lower, while Sensex fell 2.12%. All major sectors close lower in Jan’23. India’s outperformance in CY22 has faded in Jan’23. Barring India (down 2% MoM) and Indonesia (flat MoM), Jan’23 saw key global markets such as Korea (+8%), Taiwan (+8%), MSCI EM (+8%), the US (+6%), China (+5%), Japan (+5%), the UK (+4%), Russia (+4%), and Brazil (+3%) close higher in local currency terms.

Key Reasons, for this under performance:

  • Higher Valuations compared to peers in Emerging MarketsIndia was trading at 22 PE compared to 11.5 PE for Emerging markets. India hugely benefited from crisis in these countries (China Lock down and Russia-Ukraine War). Now since things are settling there, FIIs are realigning their portfolios and booking profits in India.
  • China opening-up after strict lockdown – During the past year, India had seen strong FPI outflows at the beginning of the year but as Russia-Ukraine conflict grew and China cracked down on its tech companies, the investors shunned these markets. India benefitted at the margin. Now, as China opens-up and its markets perform better, investors are realigning their portfolios and in the middle of another commodity up-move, India is seeing some FPI outflows.
  • Pre-Budget Selling – Traditionally markets go lighter before Budget. There were many rumours of hike in capital gain loss tenure, Govt opting for a populist budget before 2024 elections. Hence profit booking was done before that.

Key Events, that has set the tone for February:

  • Union Budget 2023-24: Furthering the efforts to boost the economic resilience considering the global growth moderation, the Union Budget 2023-24 attempts calibrated steps in the right direction. Focus on boost to infrastructure and capital spending along with fiscal prudence is a big positive. The budget rightly avoids populist measures in the pre-election year and prioritizes long term growth.
  • Major Announcements – Tax & Financial Sector:
    • Rebate limit of INR 5 lakh is proposed to be revised to INR 7 lakh.
    • The number of tax slabs have been reduced to 5 from 6. NIL tax rate is proposed for income up to INR 3 lakh vs INR 2.5 lakh.
    • Income from non ULIP life insurance policies having premium above INR 5 lakh per annum is proposed to be taxed, applicable for new policies after 1 April 2023.
    • Maximum deposit limit for Senior Citizen Savings Scheme to be enhanced from INR 15 lakh to INR 30 lakh.

Overall Verdict– Positive for Markets 👍

  • RBI Policy Meet: RBI in its Feb policy meet increased the repo rate by 25 bps to 6.5% from 6.25%. Sixth hike in a row, despite inflation cooling off. Surprisingly RBI was hawkish and remain focused on “withdrawal of accommodation” stance while supporting growth. RBI is expecting inflation to remain above the 4% target. RBI projects retail Inflation lower from 6.7% to 6.5% in FY23. Retail inflation projected at 5.3% for the next fiscal.
  • FY23 Real GDP growth projection increased to 7% from 6.8% & 6.4% in FY24.

Overall Verdict– Positive for Markets 👍 – Max another 25-bps hike in next policy meet and a pause after that.

  • Adani stocks meltdown: US based short seller Hindenburg Research, released its research report on Adani just a day before the company’s FPO was about to go live raising 20K Cr from the market.
  • Hindenburg Research allege that Gautam Adani, founder and chairman of the group, has added over $100 billion to his net worth over the last three years, largely through stock price appreciation in the group’s seven key listed companies, which have spiked about 819% in the same period.
  • The impact of this report led to heavy selling in Adani group stocks. Company somehow managed to subscribe its FPO but cancelled it a day later as it felt going ahead with the issue will be morally incorrect and not beneficial for investors.
  • The Adani group stocks (including Ambuja, ACC and NDTV) have lost around Rs 9.5 lakh crores or about 49 per cent of their combined market cap in the last nine trading sessions (from January 24 to February 6 2023).
  • Though it was a well-known news that Adani Stocks were overpriced, that’s the reason Mutual Funds stayed away from this group and did not have much exposure to the group apart from Index funds as Adani is part of Index, hence compulsory inclusion.
  • Adani group companies have little analyst coverage. Analyst reports play an important role in helping investors make informed decisions and a low or nil coverage reflects poorly on the quality of the company. It is often looked upon as a sign of lack of genuine investor interest, which makes brokerages and analysts give the company a miss in terms of tracking it.
  • In conclusion, the Hindenburg report on Adani Group raises serious concerns about the company’s financial and operational practices, as well as its environmental impact. While Adani Group has strongly denied the allegations, it is important for investors and regulators to take these concerns seriously and to undertake a thorough investigation of the claims made in the report. The report’s release is a reminder of the need for increased transparency and accountability in the business world and the importance of ensuring that companies operate ethically and sustainably.

Overall Verdict– Negative for Markets 👎 We recommend not to take any exposure in these stocks and wait till the dust settles down. One can witness huge volatility in these stocks in next one month period, but there are enough good stocks available with low valuations and clean corporate governance, which one can always bet on.

Overall Impact of above 3 events:

  • Last few months FIIs were net sellers but market was ably supported by local DII funds, which helped markets-maintained level, even when global peers were falling.
  • It’s now 1.5 years of market under performance and budget was seen as a positive catalyst which would have turned the next leg of growth in markets. Though the budget delivered on its expectations, but it was nullified by Adani news, denting the confidence of even domestic investors.
  • Hence, we expect markets to remain sideways for few months and one can start a move only after next quarter’s results announcement.
  • Since markets touched fair valuations post this fall, shifting from Debt to Equity is recommended. There are no further major events this month, hence we are expecting markets to remain sideways.
  • One can allocate 100% in Equity segment this month on the Asset Allocation Modelling.

Happy Investing!

Mushtaq Kazi
Mushtaq is the co-founder of Mushtaq has had corporate stints with Kotak Securities & IIFL group. He holds an MBA degree from Pune University.
His interests include cooking & gardening. When he is not cooking or gardening, he is writing.