Synopsis May 2023

In May '23, we experienced consecutive months of market growth. The NIFTY 50 index increased by 2.26% from 18,534 on May 2nd to 18,892 on June 2nd, closing. Similarly, the NIFTY 500 index also rose by 3.5% during the same period. Interestingly, the BSE Small Cap Index demonstrated a significant increase of 6.56% in the last month. This suggests a portion of funds flowing from large-cap stocks to smaller-cap stocks, which tend to exhibit higher volatility due to lower liquidity and perceived risk.

The overall lower market risk environment can be attributed to factors such as moderating year-on-year inflation growth, interest rates reaching their peak, the resolution of uncertainty surrounding the US "debt ceiling" issue, and an overall belief that the worst for the global economy will be over by the end of 2023. The market always anticipates the future ahead of time, although the extent of anticipation depends on factors such as liquidity, interest rates, and the overall sentiment regarding the global macroeconomy.

We believe that the Indian economy has slowed down compared to last year, but fortunately, the slowdown has not been as severe as anticipated. The year-on-year GDP growth for Q4 '23 was 6.1%, resulting in an estimated overall growth rate of about 7.2% for FY '23. The higher GDP growth was primarily driven by federal government expenditure. However, private consumption, which constitutes 60% of the economy, only grew by 2.8% year-on-year in Q4 '23, reflecting the impact of inflation on middle and lower-income individuals. Nevertheless, this is an improvement compared to the 2.2% growth witnessed in Q3 '23. Therefore, we can cautiously state that inflation is affecting people to a slightly lesser extent.

We anticipate that the upward trend in year-on-year growth in private consumption will continue, barring any adverse effects from the monsoon season. In Q1 '24, government capital expenditure may slow down temporarily, but we expect it to pick up in the second half of the year due to the scheduled elections in May of the following year. However, if there is a chance that the election is rescheduled to the winter period to coincide with other state elections, government capital expenditure may not be curtailed in Q1 '24. Private capital expenditure is showing a gradual uptrend, although both exports and imports experienced a marginal decline in Q4 '23.

We believe that specific sectors such as industrial and capital goods will lead the future growth in private capital expenditure, considering their stagnancy over the past 14 years.

Most economists project the economy to grow between 5.8% and 6.3% in FY 24. However, we do not give significant weightage to these projections as they do not substantially alter our investment thesis. Instead, we focus on observing marginal changes and improvements or deterioration at the macro, sector, industry, and company levels. We analyze the macro picture, but we do not base our decisions on long-range projections. Nevertheless, we are confident that India will continue to be the fastest-growing economy among larger countries.

Given the recent 12% to 14% increase across indices, many people are curious about what lies ahead. Our perspective is that most indices are currently hovering around the highs of October '21. The market has been consolidating within this range for almost 20 months. While it may exhibit a directionless trend and experience sector rotations, we do not foresee any significant market decline. If foreign investment continues to flow into the market as it has over the past three months, there is a higher probability of breaking the 20-month consolidation phase

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