FY23 has brought investors at a critical cross road. While Indian economy has continued to build up (and even stronger than past) on some of the points like earnings growth, deleveraging and rising capex announcement and robust government budget, global climate turned more turbulent with hawkish US Federal reserve and recent crisis between Russia and Ukraine.

As always, data and logic would provide a clearer insight – and then it is a leap of faith either ways. Let us look at some data points :

Global indices have typically been resilient through wars and geo-political events, by and large. If one were to look at crises emanating out of war, specifically globally, markets tend to do quite well after a 9-12 month period at best.

While India has refused to take sides in the crisis, it will benefit a lot from strong undercurrents appearing on domestic front.

The profitability of Nifty 50 companies (EPS) has gone by over 55% over the last two years from 472 (FY20) to 735 (FY22E) clearly showing that the pandemic has accelerated consolidation in favour of the organized sector.

Valuations, too, have moderated and companies look more reasonably priced. This, on the back of the fact that there one is seeing early signs of growth coming in sectors like infrastructure, real estate, BFSI as well as bottoming out of performance in sectors like auto and metals, the risk reward ratio of investing for a 15-20% gain during the year is more favourable than a few months ago

Rupee has shown remarkable resilience during the current crisis. It is not just a manifestation of the foreign reserves in excess of $ 617 billion that we have now and prudent monetary policies by RBI, but also the fact that due to a rising inflation in countries like the US, the rupee drag has been minimized to a significant degree.

Having said that, if oil prices continue to hover at elevated levels, the impact of inflation could creep in back-ended into the CAD, and this might put pressure on the rupee. The RBI has been quite mature by talking the market down rather than announcing any knee-jerk policies. This augurs well for corporate India going forward

Robust balance sheets across the board: The data on the debt is not available for H1FY22. However, for 144 companies (ex-BFSI) out of Nifty 200 index, the operating cash flow (post working capital and taxes) grew by 18% for H1FY22. We believe that there are two barometers of strength of financial system, viz., amount of NPAs and tier I capital adequacy. Despite, multiple waves of COVID, the gross and net NPAs of 34 major listed banks for Dec-21 in fact declined 5% and 23% each over Dec-19 (pre-COVID).

FII flows no longer imperative:For the last 3-4 months, DIIs have been supporting the market against FII selling and have added $13.3 Bn during this period while FIIs pulled out $14.3 Bn.

Conversely, we really do not know the impact of the war if it goes on for long. Hardships due to an economic fallout post a war have seldom hit developed countries, the way it seems like happening now. To not an expect a ripple effect world over for some time would be fool-hardy.

Having said that, I would err on the side of optimism and believe that the markets will be very stock specific for the next few quarters. Substantial gains would be made by investors who are laser sharp in their focus on capturing trends rather than getting carried away by the noise. The Nifty might be in the same range or a bit higher, but individual stocks will probably drive the alpha in one’s portfolio in a much more decisive manner. Nifty 50 forward PE is down 15% from its peak from around 23 to around 19. Finance, Autos and FMCG appear attractive at current valuations as they trade below their 5 year mean and at or below their pre-Covid levels.

We believe that until the inflationary pressure subsides and better clarity emerges on the pace of informal sector recovery and rural demand outlook, high-quality structural winners provide a better risk-reward in the current environment

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