Valuation versus growth: principal point for 2023

With a 1 year forward P/E of 21.80, India remains the most expensive major stock market in the world.
In dollar (USD) denomination MSCI India index is trading at a premium of 43% to MSCI Emerging Markets index and 92% to MSCI World index. Foreign Institutional Investors sold Indian equities relentlessly for 9 months (October 2021 to June 2022) and still remains net sellers though the size of selling has been reduced susbstantially. While every other major developed as well as emerging market lost anywhere between 10% to 30%, India managed to come out nearly unscathed with +4.32% performance for CY 2022.
As per World Bank, India’s real GDP should grow at 6.9% in FY 2022-2023, which is similar to the figure given by Reserve Bank of India (RBI) at 6.8%. When the world is talking about recession, India is bound to grow.
But this outperformance has placed India at a rather unique position from stock market performance perspective for 2023.

The current world economy can majorly be divided in below two pockets :

1. Deep value : This portion includes developed as well as emerging economies. If the US recession is indeed a shallow one (assuming it is allowed to occur by adamant instance of the Fed), the areas of markets which have shed most value will appear to be highly lucrative. This covers most rate sensitive sectors like tech and housing.
Chinese tech and Hong Kong equity had fallen most notably and even large cap stocks were so oversold that the slightest positive news on China reopening sparked a 35%+ rally in Hang Seng and 9.34% in SZSE Component in just last 2 months, despite muted growth projections.

2. High growth : India falls under this category which as mentioned previously has shown remarkable resilient performance so far. Loss making companies which have been burning cash will also be placed in this pocket due to their consistent double digit QOQ top line growth.

Conclusion: If Fed funds rate peaks in proximity of 5% and then further trajectory is traced downwards in second half of this year, then high growth portion will do well and India’s outperformance should continue.
Otherwise if it is taken much above 5% and then held there throughout the year (as the Fed Chair has said in most recent Fed minutes), we believe it will cause the money to flow into parts of deep value and fixed income assets. India should do well than global peers, irrespective of the stance of the Fed.

Last updated on February 26th, 2023 at 11:31 am