Market kicks off FY23 on a strong note! A 10-point guide on where India stands, 15 stock ideas by HSBC

Largely driven by metal, energy and IT stocks, the Indian domestic market ended the financial year 2021-22 (FY22) on a positive note as benchmarks Nifty50 and the Sensex settled with nearly 18% gains in year marred with volatility.

Nifty midcap and smallcap indices too ended with over 25% gains each despite huge profit taking and reasonable correction from October 2021 peak. The correction was triggered due to stretched valuations of the Indian market, geopolitical concerns, spike in crude, rising inflation and anticipation Fed rates hike. 

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After being the best performer regionally in 2021, the Indian market has fallen 8% from its peak as on March 30, and is valued now at 5-year mean, as per HSBC report. 

The market breadth has contracted to 40%, the lowest since the COVID-19 led sell-off in 2020

The domestic stock market still stares at uncertainties in the short-term with spike in crude, relentless selling by FIIs (Foreign Institutional Investors), global liquidity tightening and inflation. 

HSBC research suggests that if oil prices stay above USD100/bbl for long, it will add1ppt to inflation and drag GDP by 0.9ppt, while FIIs outflows, which saw selling 80% in financials and IT sectors is now at decade-low levels, and barring a tail risk, appear to have peaked. However, a prolonged conflict may still trigger further selling, it says.  As per the brokerage, global liquidity tightening, and inflation remain overarching concerns of all. 

Nevertheless, the domestic equity market kicked off FY23 in style as Nifty50 and the Sensex closed the first session of fresh year with gains of over 1% on Friday, April 1, 2022.

Positive factors: 

Potential progress on peaceful resolution of the Russia-Ukraine conflict would clearly be a positive catalyst. Supportive market valuation, with Nifty50 at c19x fwd PE, near its 5-year mean −financials, FMCG, autos below their 5-year mean valuation. Largely stable earnings outlook with Nifty50 FY23 EPS growth at 18.9% yoy. Prospect of a new phase of investment-led growth.

As Financial Year 2022 has ended and the Indian market has entered a fresh year, HSBC Global research gives a 10-point insight to understand where the market stands currently. 

1. India was the top performer among regional peers in 2021 (FTSE India up 28%in USD terms), but since its October peak, has lagged many peers with an 8% correction, but still outperforms EMs (emerging markets) and AxJ (Asia excluding Japan).

2. Valuation, which had corrected below 5-year mean, has now recovered modestly (Nifty50 at 5-year average one-year forward PEof c19x).

3. India has seen around USD19bn FII outflows since October peak and around USD15bn outflow ytd. Currently, FIIs are moderately underweight in India, with 18.5% ownership. 

4. DII (Domestic Institutional Investors) flows have been an offsetting factor, with USD21bn inflow since October 2021. Retail flows, both directly and through the mutual funds’ systematic investment plans (SIPs), have supported the overall market, offsetting the relentless FII selling.

5. Market breadth is now close to 40% (number of stocks above 200 DMA level), which had peaked around c100% in October2021. 77% of FTSE India constituents trade below their 200DMA. This also seems to suggest that any sharp downside is unlikely unless a tail event is in the picture.

6. External factors still pose a material risk to India’s investment case: If Crude stays above $100 per barrel, it poses a key macro challenge for India. Rising US bond yields and end of easy liquidity too are negative, although these are not new unknowns. Geopolitical situation presents its own uncertainty, but if progress towards peace is visible, this may present an upside risk too.

7. GDP growth, fx and inflation: FY23 GDP growth is expected at 6.8% and inflation at 5.6%, and INR is likely to remain under pressure in the near-term, hovering around 77 before slightly correcting to end the year at 76.

8. Earnings downgrade risk still persists: FY22 and FY23 headline NIFTY earnings expectations are still resilient at 37% and 19% and have seen little downgrade at the index level. However, Autos and FMCG sector expectations have come down given demand conditions look unfavourable in the near term. Incrementally, some downgrade risk to earnings still persists.

9. Market outlook and approach: Risk aversion may persist in the near term given the uncertainties on demand, earnings, and external factors. Selective ‘risk-on’ as peace talks progress. We seek defensiveness and also laggards of the last couple of years, especially structurally strong players which have corrected in the market sell-off. We also look for stocks sensitive to crude prices decline and recovery plays as the economy continues to open up.

10. Sector and stock preferences: HSBC is positive on financials, especially large cap private lenders. It also like IT and Pharma for the defensiveness they offer. Selective Automobile stocks which have corrected, Consumer discretionary names such as Jubilant Foodworks and Nykaa. Beneficiaries of long-term capex revival (L&T, KEI), and selected names in other sectors.

Trading Ideas: 

HSBC Key ideas are centred around preferred sectors across financials, industrials, IT, and Pharma along with bottom-up ideas in consumer energy. Preferred stock picks from these sectors are ICICI Bank, HDFC Bank, Infosys, Bajaj Auto, Maruti, L&T, Jubilant, HUL, Petronet, FSN Ventures, Havells, KEI, Apollo Hospitals and Sun Pharma.