The year 2022 has just zipped by, even before one has digested the multiple events that marked the year. If one is asked the key events of 2022, the most spontaneous response would be the Russia-Ukraine war. While it surely jolted the world out of it’s siesta, but, the fight against inflation and resurgence of Covid in China, were events that were disruptive enough. These 3 events together made 2022, a challenging year. The world as we see it today, is fairly fragmented and the chasm between countries shows no sign of bridging, not as yet. This divide would have far reaching impact on the way the world works, in future. The relative stability or the comfortable instability, that we are all used to is soon becoming a thing of the past. Technological changes, geopolitics, Covid, climatic changes, hawkish central banks, etc could lead to widespread changes in our surroundings. Some of the changes that we envisage are given in the following paras.
Supply chain issues would continue to linger on, leading to pockets of surplus and deficits in various parts of the globe. This could lead to volatility and unpredictability in commodity cycles. Critical products like semiconductors may need more manufacturers to be able to reduce concentration in the hands of the few.
Climatic changes would bring along with them several health issues and food shortages. Large swathes of people in Africa are already gripped in the throes of health and food issues. Water scarcity too is accentuating with several people across the globe having no access to it. Energy security is also becoming an issue as several countries revert back to conventional fuel sources, due to scarcity of gas due to Russia Ukraine War
Free flow of skills and capital, is increasingly becoming difficult. Several developed countries are clamping down on immigration, to be able to provide jobs to their own citizens. Larger countries with access to skilled labour and capital should be well off as compared to countries dependent on them.
Inflation could become less predictable and at times more sticky due to absence of a global market place. Protectionism will lead to unevenness of inflation across various countries of the globe over a period of time. As we write this note, there are several countries that are battling inflation by increasing interest rates while there are many who are trying to stimulate growth by cutting rates. Not very long time ago, most central banks worked in unison. Now no, more!! Central bank action could become more localised and country specific rather than global.
Continuing tight money policy would drain out liquidity from the system, leading to liquidity crunch, in several countries. Private equity funding, which has been at the forefront since the Lehman crisis and which has fostered innovation, could slowdown significantly. The flip side is that reckless funding would stop and funds would be available to the more deserving.
So, what does all this mean for stock market investors? In 2022, we witnessed global markets, especially the techs, take a hard knock. The Indian markets managed to scrape through although the Nifty ended the year with a return that was lower than the liquid funds. However, the outperformance over other global markets, in the wake of several problems, was noteworthy. Our corporates did a good job, in growing the topline but had to struggle against war infused inflation. Margins were hit quite meaningfully. Rising markets and slowing profit growth meant expensiveness of valuations. Indian markets are at a significant premium to global markets. While the premium would continue but the magnitude would narrow down.
So, what does 2023 portend for all of us? We do believe that the long term investment story of India, continues to be solid. It is only the medium term, where one could witness some amount of correction. Corporate results in 2023 would be more sober as compared to 2022, with low base effect, for topline, no more available. With some sobering in inflation, partial recovery can be seen in margins. We expect domestic stories to do better than the exports oriented stories. We expect infrastructure, engineering, banking & finance, defence, etc should do well. If the war in Ukraine stops, the investment outlook for export oriented businesses and commodities could brighten. While the central banks have sounded hawkish, for most of 2022 and will continue to follow suit for a part of 2023, we do expect the tone to pacify towards the end of the current calendar. This would augur well both for bond and equity markets. Bond markets in particular could be expected to do as well as equity markets in the current year, if not better.
Before we conclude, we wish to mention that while the outlook for equity investors looks a tad challenging for 2023, but, stock pickers should continue to make merry, through out the year! We request all of our investors to continue to be invested in robust portfolios for the long haul, to benefit from compounding!!
This article has been written by Team Capital Portfolio Advisors. Any part of the content of this article should not be construed as, an offer or solicitation to buy or sell any securities or make any investments. The content shall not to be relied upon as advisory or authoritative or taken in substitution for the exercise of due diligence and judgement by any user nor should it be used as a basis for making any decisions, without exercising user’s own judgment or diligence. As a condition for using this Blog, the user agrees that Capital Portfolio Advisor (CPA), its Founder or any of it’s employees make no representation and shall have no liability for any loss or damage, direct or indirect, arising from the use of the Blog. CPA reserves the right to change the content of the Blog without prior notice.