FIIs' emphasis on medium-term outlook: Recession fears persist

As the Lok Sabha elections are going to be held next year, there will be uncertainty in the markets

The first four months of calendar year 2023 have been extremely volatile for global markets. At current levels, markets have not reflected the impact of key concerns, leaving the possibility of weak domestic growth or a cyclical slowdown. In December last year, the Nifty was targeting 19,030 in calendar year 2023. Whether this is achievable now given high interest rates, inflation and a potential recession is impossible to say.

According to market insiders, the macroeconomic outlook remains uncertain. We are now very close to the top of the rate hike cycle. However, if the path of inflation remains uncertain, the policy environment may be affected. Prolonged high rates could lead to a sharp recession, especially in developed markets.

These large uncertainties can adversely affect the markets. However, India could emerge stronger amid this recessionary cycle, Nomura Securities sources said. Nifty has declined since October 2021. Valuation has become more attractive. So players are following the 'buy-the-dip' strategy.

Any major upheaval at the global level will have an impact on the Indian market and economy. In case of risk environment, slowdown in capital inflows will adversely affect India. Global uncertainties will also affect the investment cycle.

However, focus on factors like fiscal discipline, debt reduction on corporate balance sheets, strong bank balance sheets, policy initiatives for investment-led growth can help make India more efficient. There are risks to both earnings estimates and valuation multiples for the IT sector. However, household sector incomes have remained largely stable.

Analysts are seeing an increase in banks' margins, although asset quality remains strong. Consumer firms have been helped by higher margins coupled with improved pricing efficiency. A fall in raw material prices will provide some support to income growth. However, sales growth is showing signs of slowing down. Foreign investors remain uncertain on India from a medium-term perspective. India's high valuation is the main problem, which seems reasonable now, as the market has been flat for the past 18 months.

Foreign investors may be overconfident on Indian markets. In the regional context, given the improvement in valuations, China and South Korea are still overweight.

The outcome of any state elections does not determine the outcome of national elections. We have seen in the past that there is a huge difference in turnout for state and national elections. Next year will see some uncertainty in the markets as we enter the election period.

Economists expect the RBI to pause on rate hikes in the near term and also expect a rate cut later in the year. Global factors, including a weaker-than-expected monsoon and current uncertainty regarding growth, have raised the possibility of a change in outlook by the central bank later this year. Markets are relatively less concerned about inflation or interest rates. The biggest concern that hasn't fully hit the markets yet is weaker growth or a larger cyclical-based drawdown.