Global cues have been worsening, casting a shadow on the longevity of the rally seen in Indian markets recently.
1. The Fed raised rates again last week to curb inflation. It dropped its ‘anticipation’ of further hikes from its commentary, pushing the markets to find optimism. But pause or not, a recession in the US has gone from probable to obvious, and everyone’s holding tight as the hard hit comes closer
2. Inflation in the UK at 10% coupled with a slowing economy had the country look forward to King Charles’ coronation for a boost in the economy - US$ 437 million of an expected boost because of pubs, hotels and merch.
3. Oil prices fell for three weeks straight, causing concern over the US economy. However, OPEC has been cutting supply, and oil companies in the US have been banking on a strong second half as China rebounds, making the price easing feel temporary.
The Indian markets aren’t immune to global pressures. With the Fed raising rates by 25bps and the RBI pausing, we are back to the 1.5-year-old argument of downside pressure from relative rate differentials for the Indian economy, which is likely to cause foreign fund outflows for better risk-reward, drops in export revenue, and currency depreciation.
To add to that pressure, 300 more companies are set to announce their quarterly earnings next week. Announcements so far have been pretty dim with growth down to its slowest pace since December 2020, and further disappoints may continue putting pressure on the markets.
With all these headwinds, the Indian markets might just see some consolidation in the near term. However, there is no denying that the structural story for India is intact. Amid these corrections, several companies have been offering good opportunities for investors to get in.
The mid and small-cap indices have outperformed the Nifty 50 in FY23, which would ideally be counter-intuitive given high-risk aversion, and the overall choppiness of the markets. However, that has the potential to continue into the next year as well.
There are several mid and small-cap stocks that qualify on several basic checks - quality businesses, good governance standards, in an expansionary phase, earnings growth visibility, healthy balance sheets, and inexpensive valuations.
Look at last week for instance - Indian Hotels hit an all-time high, RVNL rallied 30% after winning a Rs. 2,249 crore order, Patel Engineering won orders worth Rs. 1,310 crore and went up nearly 20%, PI Industries was up after it acquired two companies in the CDMO space.
The overall volatility and switches in direction have been making alpha generation quite tricky over the last year and a half. However, beyond the headline indices, a deeper look into quality stocks brings out immense potential for making money, which is very well likely to continue through the next year, as pressures remain.