Geopolitical crisis and stock market

FY23 has brought investors to a critical crossroads. While India’s economy has continued to grow (and even stronger than in the past) on some points such as earnings growth, deleveraging and increased capital spending, and a strong government budget, the global climate is it became more turbulent with the hawkish US Federal Reserve and the recent Russia-Russia crisis. Ukraine.

As always, data and logic would provide more insight, and so it’s a leap of faith either way. Let’s look at some data points:

Global indices have generally withstood wars and geopolitical events. If one were to look at crises emanating from war, specifically globally, markets tend to do quite well after a period of 9-12 months at best.

Source: Emkay Investment Managers

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Source: Emkay Investment Managers

While India has refused to take sides in the crisis, it stands to benefit greatly from strong undercurrents appearing on the home front.

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

RatingsThey have also moderated and companies are looking for more reasonable prices. This, due to the fact that early signs of growth are being seen in sectors like infrastructure, real estate, BFSI, as well as bottoming out in sectors like autos and metals, the risk-reward ratio of investing for a 15-20% return during the year is more favorable than a few months ago

Rupee has shown remarkable resilience during the current crisis. It is not only a manifestation of the foreign reserves exceeding $617bn that we have now and the RBI’s prudent monetary policies, but also the fact that due to rising inflation in countries like the US, the drag on the rupee has been downplayed to a significant degree.

Having said that, if oil prices continue to hover around elevated levels, the impact of inflation could creep into the CAD, and this could put pressure on the rupee. The RBI has been quite mature in convincing the market rather than announcing knee-jerk policies. This bodes well for Indian companies in the future.

Strong balance sheets across the board: Debt data is not available for H1FY22. However, for 144 Nifty 200 companies (ex-BFSI), operating cash flow (after working capital and taxes) grew 18% for H1FY22. We believe that there are two barometers of the soundness of the financial system, namely the number of NPAs and the adequacy of Tier I capital. Despite multiple waves of COVID, the gross and net NPAs of 34 major listed banks Stocks for December 21 were actually down 5% and 23% each over December 19 (pre-COVID).

FII flows are no longer essential:For the last 3-4 months, IIDs have been supporting the market against FII selling and have added $13.3bn during this period, while FIIs took out $14.3bn.

On the contrary, we really do not know the impact of the war if it is prolonged. Difficulties due to the economic fallout after a war have seldom hit developed countries, as seems to be happening now. Not expecting a worldwide ripple effect for some time would be foolish.

Having said that, I would err on the side of optimism and I think the markets will be very stock specific over the next few quarters. Substantial gains would be made by investors who focus on capturing trends rather than being carried away by the noise. The Nifty may be in the same range or slightly higher, but individual stocks will likely drive alpha in one’s portfolio in a much more decisive way. Nifty 50 forward PE is down 15% from its peak of around 23 to around 19. Financials, autos, and FMCG look attractive at current valuations, trading below their 5-year moving average and at or below their pre-Covid levels.

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

Disclaimer: Investment products are subject to market risks; Please read all documents related to the fund carefully before investing.

(Vikaas M Sachdeva is the CEO of Emkay Investment Managers Ltd.)

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