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Below is Year-ender and outlook 2023 note by Motilal Oswal Broking and Distribution

India outshined global markets in the year 2022, as it stood resilient to several global headwinds like; high inflation, rising interest rates, currency swings, geopolitics uncertainties and the onslaught of FII selling. This resilience has been led by several structural tailwinds which has placed India in a bright spot on the world map.

Despite a roller-coaster ride, Nifty gained 7% (as of 12th Dec) for the year as compared to 10-20% fall in most of the global indices. Infact it touched a fresh life high of 18,888 in Nov’22. Nifty Midcap index too remained resilient and gained 7% YTD. However Nifty Smallcap index faced the major brunt with a fall of -11%. PSU Banks were clear outlier, witnessing a rally of 72% in the year till date.

The driving force behind India’s outperformance has been:

Pick up in capex by Central Government which revived Indian economy from Covid-led slump and
Strong consumption demand which reflected in the buoyant domestic macro data points. GST collection stood above Rs1.4 lakh crore for 8th consecutive month while e-way bill generation has remained above 7 crores since Mar’22.
Combination of these factors have resulted in strong corporate earnings growth of 24% CAGR over FY20-22. Other economic indicators like GDP and PMI too recovered well post pandemic and has maintained its strength since then. This reflected in the credit growth upcycle which has been growing at decadal high of more than 15% for past few months. Cyclical upturn in many sectors (Real estate, Auto, Banking, Telecom etc.), and industry consolidation have led capacity utilization to recover to long term average of 75% which is expected to fuel fresh private investment. In addition, rising scope of outsourcing on account of China+1 and Europe+1, along with various government initiatives like Atmanirbhar Bharat, make in India will propel manufacturing contribution to GDP higher from current 15%. On the other hand, Inflation which has been a concern so far has tumbled to an 11-month low of 5.88% (Nov’22) and has fallen under RBI’s mandated tolerance band of 2-6%. Thus going ahead, with accelerated push by Centre towards capex and expected revival in private investment along with peaking inflation, Nifty earnings are expected to remain robust and grow at 17% CAGR over FY22-24.

India stands out like an oasis in the desert, where rest of world is facing multiple challenges. Domestic flows too have remained strong and now FIIs have turned buyers. Nifty now trades at a 1-year forward P/E of 20x, which seems fair, in our view.

As we step into CY23, the global factors, like recessionary fears, geo-political risks and rising covid cases in China could keep the equity markets volatile. US Fed policy actions in 2023 along with RBI’s would hold importance where any moderation might encourage markets to pick up momentum.  We expect two themes to play out in CY23 viz. credit growth and capex and thus sectors like BFSI, capital goods, infrastructure, cement, housing, defence, railways could be in focus.

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