Sensex tanks nearly 2,000 points in 2023; these 3 factors can give stock market a reason to cheer

Bears stood on the front foot on Dalal Street in the past 40 trading sessions of 2023 till February 27. Data showed that the benchmark equity index cracked in 21 sessions so far in the ongoing calendar year. Overall, the BSE Sensex has lost nearly 2,000 points, or over 3 per cent on a year-to-date basis. So, what is needed to bring bulls back on track in 2023?

In an interaction with Business Today, Sanjay Bembalkar, Co-Head of Equity, Union Asset Management Company said that positive developments related to the manufacturing ecosystem, rural economy and neutralising monetary policy stances can add some spark to the dull equity market in the near term.

He further said that the government is focusing on providing the groundwork for the nation’s long-term growth through initiatives like the Production Linked Incentive (PLI) programme and increased infrastructure spending. These initiatives might help India develop into a manufacturing powerhouse and bring in sizable business for Indian manufacturers. “As we may experience order inflows on account of these realignment of supply chains globally, we believe that should force investors to refresh their expectations of growth going ahead,” Bembalkar said adding rural revival is crucial to provide broad-based growth and consumption fillip to the economy.

Last but not the least, the fund manager believes that any move by the global central banks to alter the direction of monetary policy-any efforts to bring in accommodative monetary policies may inject liquidity into the overall financial system. “Likelihood of such an occurrence, in our opinion, is currently low,” Bembalkar said.

Market outlook

On asking how the market may move in the ongoing year, he said that the domestic equity market may stay volatile in the short term. However, Bembalkar is positive about India’s structural growth story.

“Our Government is keen to make India a global manufacturing hub and is making deliberate efforts to stimulate manufacturing activity within the nation. India’s private consumption is on a structural growth path. In fact, as per International Monetary Fund (IMF) data, India is one of the fastest-growing large economies. Hence, we find the risk-reward trade-off favourable for investors with long-term horizon (beyond 3 years),” he said.

On a year-to-date basis, the NSE Nifty index declined 3.50 per cent to 17465.80 on February 24, 2023 from 18105.30 on December 30 last year. On the other hand, broader index Nifty 500 plunged 5.3 per cent to 14,630.45 during the same period.

Sectors to bet on

Considering the present economic conditions, the market watcher thinks that sectors dependent on local, controllable variables and that are relatively less exposed to global risks like potential recession in the developed world may gain going ahead. “Financials is one such sector. We see many good quality lending companies that have seen a significant improvement in the balance sheet from the pandemic levels and are primed for growth. In a fast-growing economy like ours, they are likely to witness a favourable business cycle over the medium term,” Bembalkar said.

He further added that the nominal GDP growth rate may likely be in the low double digits for the next five years. Given that the population growth is around 1 per cent, an individual’s average per capita income is likely to grow at a healthy rate. This incremental growth in the per capita income should provide a fillip to discretionary consumption. “Consumer discretionary and telecommunications sectors may see strong structural growth for years to come,” he said.

Among the sectoral indices on the NSE, the IT index has gained nearly 7 per cent YTD. Sharing his views on IT stocks, Bembalkar said they turned underweight in IT in January 2022 due to the sector’s unfavourable risk reward. “Since then we have seen that stocks have corrected materially. At present, our fair value analysis indicates that the risk-reward ratio is significantly better than it was on January 22, and hence we are no longer underweight in IT. Due to the inherently global nature of the business, IT companies may see volatility in the near term however the long-term potential of these companies is quite attractive based on the quality of businesses as well as management,” he said.

Take on Q3 results

On the positive side, the money managers observed that banking sector growth was broad-based in the December quarter as credit growth, as well as margin expansion, was experienced. “Premiumisation trend in discretionary consumption was seen intact in this overall inflationary turmoil. IT sector experienced the continuation of demand though nature of demand shifted to cost take-out contracts and outlook is still upbeat,” he said.

On the other hand, he noticed that overall domestic consumption-led sectors like durables, quick service restaurants (QSRs) and the automobile sector saw weakness in demand recovery post-festive season. “Staples sector witnessed rural and bottom-of-the-pyramid weakness in demand. To tackle inflation, consumers were seen shifting to low-value packs or deferred purchases wherever possible. Commodity inflation impact was seen in businesses like industrials, durables and metals,” he said.

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