Investment Shastra
november 2022 stock market outlook

November 2022 Stock Market Outlook

Sensex was up 5.8% in the month of October’22

indices returns last 1 month and 1 year

The Sensex posted its biggest monthly gain since the last 3 months in October, up by 5.8% in the month. The rally was led by PSUs, Banks, and Capital Goods. All sectoral indices, apart from FMCG, ended the month with positive returns. Major drivers for the performance were RBI’s repo rate hike by 50bps when the economy is facing global headwinds, upbeat corporate earnings, and expectations of relatively lesser hawkish stances by the major global central banks.

FPIs reduce selling substantially

fii and dii cash market activities

Turning net buyers after 11 months in August’22, FPIs again resorted to heavy selling in September. However, the pace of selling slowed down drastically in October, with FPIs selling ~Rs. 489 crs in the cash market. The Indian market attracted FPIs due to the global rally of equities in the month.

Markets moving above Nifty @ MRP

At the time of writing this, Nifty 50 currently trades ~17% above its fair value, while there are pockets of extreme overvaluation and undervaluation. Nifty though is a highly concentrated portfolio dominated by the top 10 companies, hence it is not the case for all the stocks. Selected investment opportunities still persist in the market.  While the valuation multiples are high, it should be viewed in context with resilient economic recovery and an upbeat corporate earnings outlook.

Indian economic growth remains strong

India’s economic activity appears to be holding up well despite rising external headwinds. Healthy growth in high-frequency indicators like auto sales, GST collection, retail spending, power demand, railway tonnage, etc. point toward a strong growth momentum that can be sustainable.

Indian economy growth remains strong

Consumer Inflation rises in October’22

CPI increased by 40 bps in the month primarily due to a rise in food prices. Inflation in cereals (mainly rice and wheat), vegetables (tomato and potatoes), and milk were the key drivers of food inflation.

In experts’ view, the CPI has likely peaked and will possibly decelerate going forward due to favourable base effect. However, delay in the withdrawal of monsoon, among other reasons, can result in inflation being at relatively higher levels in the near term.

Valuations are reasonable

Indian markets are trading at a premium to its emerging market peers. The current valuation is slightly elevated in comparison to the long-term multiples. However, we are confident about the economy over the next 5 years. Even if we purchase shares at slightly higher prices, there is a good chance of earning healthy returns over the next 5 years. The Indian corporate sector is in the best position to gain pricing power and balance sheet strength. The majority of the sectors have seen consolidation. We are seeing this across sectors: Power, Telecom, Cement, Banks, NBFCs, Real Estate, building materials, Paper, pharma, capital goods, consumer durables, etc. This will give strong profitability for incumbents due to the high barrier to entry for the next few years.

Wait & watch as of now, despite of correction in the US

The US S&P500 has roughly 17% from its peak. We have been warning our investors about the overvaluation in the US market and had advised them to reduce their positions.  Despite of correction, we would still seek some clarity on the growth and controlled inflation before we consider adding a position in US markets.

The interest rates are expected to rise as Fed has hinted at tightening financial conditions to put an end to the 40-year high inflation in the US. Financial conditions have comparatively tightened off late yet very easily compared to the historical perspective.

Global investment firms are lowering their estimates for real GDP growth for China to 3.8% from 4.3% for 2022 and to 5.0% from 5.4% for 2023, due to longer-than-expected lockdowns and a worse-than-expected housing market correction.

Cooling down of the war between Russia & Ukraine is another factor to be monitored that can decide the further course of global markets.

How are we looking at this?

Based on a current estimate, the average upside of our coverage universe is closer to 13-14% CAGR over the next 5 years basis.

Today, we are looking at opportunities in banking and financial, infrastructure, Utility PSUs, hospitals, autos, and logistics. We continue to remain positive on existing companies that are delivering good growth.

We have added stocks in the industrials and infra segment as their balance sheets are healthy and can participate in the CAPEX cycle. We expect cash flow growth to be better than past.

Despite of correction, we see Pharma and Chemicals trading at prices ahead of their earnings growth. As of now, we have limited our allocation in that space. The same is true with few private companies in the power sector.

IT has seen a sharp correction after a 2 year long Bull Run. We are being selective in that space. The company management are giving guidance for good growth for a year or two.

We look at companies that have good earning triggers over the next 2 years.

We are investing in companies:

Coming out of sector consolidation/debt reduction, or

Introducing new products, or

Commissioning new capacities, or

Executing orders in hand

This gives certainty of growth rather than plain anticipation.

What sectors we are looking at?

After the intent of the government to continue giving a boost to the CAPEX and investment in public infrastructure, we remain positive on the companies that would benefit from the Capex cycle. Infra, logistics, and industrial-related companies would be the key beneficiaries.

We are incrementally adding to banks. Banks are the key beneficiaries of credit cycle pick-up. As industrial activity improves, the working capital loans will be drawn from banks which will lead to credit growth. In a period of rising interest rates, the banks tend to benefit for a limited period of time. That is because their liabilities are locked in at a fixed rate (which is lower) and their assets (loans) are at a floating rate. This gives them the benefit of better margins in the short term.

We had a cautious stance on banks as we expected slippages in unsecured and SME loans. But as economic recovery happened faster, we are seeing stability in retail and corporate balance sheets. Large banks (AUM > 1, 00,000 Cr) have made sufficient provisions as well as raised money to maintain a healthy capital adequacy ratio. However, almost all the banks from our coverage universe have reported good earnings. With the fear of NPA being behind, they will start lending in areas that are growing well. Recently, top management from big-sized banks has confirmed that the companies in Infra, PSU, and manufacturing are seeing good traction in asset growth backed by order book and demand both domestic and overseas. The rising inflation has led to increasing in demand for working capital loans.

We expect this to be the start of the structural credit cycle and not a one-off considering all the factors in place. The factors such as clean and capitalized balance sheets of banks (lenders), de-leveraged balance sheets of corporates (borrowers), lesser capacity addition in the economy post-2013 leading to the need for more capacity given rising demand, CAPEX program by government improving the sentiments of private players to participate.

In the last one month, we have seen the market recognizing the value of banks. Most of the private sector banks from our coverage and portfolio have seen a good run ahead of their MRPs. Given the structural benefit we still remain positive on banks.

Beware of expensive stocks that have corrected from their highs

Not all the stocks that have corrected from their highs are worth buying. We recommend being cautious about the prices that you are paying for the stocks and avoid buying high P/E stocks that have fallen off from their highs. The current high-interest rate regime may lead to some of these stocks not reach to those levels anytime soon. We believe that being selective in this kind of market towards quality stocks generating earnings and trading at reasonable valuations is a key to generate returns.

We recommend treading cautiously in small-cap companies where sales figures are below 2019 levels but may optically look at high growth today on a low base of 2020. We recommend using FY19-20 sales as a base while evaluating growth or valuation. (Compute the P/E ratio using EPS of 2019/20, Compute the P/S ratio using Sales of 2019/20). We use 1-year forward Sales and EPS figures as we estimate the future growth of companies.

What is MoneyWorks4me’s action plan for its subscribers?

We have given a couple of BUY calls in the past few months. The market has rallied since then. Given the strong dynamics of the economy, we are excited to BUY existing opportunities or new ones in near future. We are tracking more companies to add in our BUY zone; however, they are still ahead of our MRP. We might consider adding them as there is a slight correction here and there.

The deleveraged balance sheets of Indian corporates, sub-par capacity addition in the past decade, and increasing utilisation levels give us confidence on the credit cycle. This combined with the underperformance of the financial sector in the last couple of years gives us confidence on the prospects of lenders (BFSI sector).

We believe that the current economy recovery is led by the credit growth cycle which can be delayed but remains definitive. Also, the Indian corporate sector is in the best position to gain pricing power and balance sheet strength. The majority of the sectors have seen consolidation. We are looking at sectors that will be early beneficiaries of these two themes.

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Pratik Banthia

Pratik is a CFA Level-2 candidate with an M.Sc. in Finance from NMIMS. Prior to joining MoneyWorks4Me, he briefly worked in sell-side equity research. He is an avid F1 fan and loves filter coffee.