Winter chill grips domestic indices unlike Asian peers; Nifty50 falls most

Indian equities worst-performing in Jan; Nifty50, which includes two Adani stocks, falls most

Indian equities have fallen more than 2 per cent in January even as their Asian counterparts posted stellar gains. The benchmark Nifty50 fell 2.4 per cent — most among major global markets.

In dollar terms, India was the only market to log negative returns. 

All the other major Asian markets posted gains during the first month of 2023. Hong Kong’s Hang Seng rose 9.9 per cent, South Korea’s Kospi gained 8.4 per cent and China's Shanghai Composite rose 5.4 per cent. The gains were even more in dollar terms, amid a retreat in the greenback. Most European markets also posted sharp gains.

According to Bloomberg, this is the best January performance for Asian stocks since 1994 amid intensifying bets that the region will beat global peers as China’s reopening is set to add more gains.

Asia is becoming a preferred destination for global investors as China dismantles its zero Covid-19strategy. The lower risk of recession for most countries in Asia, compared to developed economies, is also aiding investor interest.

The profit outlook for the region has improved considerably since the end of October, with 12-month forward earnings estimates for MSCI’s key Asia gauge rising more than 6 per cent. This compares with a drop of over 2 per cent each for the main indices representing the US and Europe, according to data compiled by Bloomberg.

However, Indian markets have not benefited from the interest in Asian equities.

India’s valuation premium, elevated interest rates, and China’s reopening are leading to the reallocation of funds by foreign portfolio investors (FPIs), say industry observers. So far in January, investors have sold shares worth Rs 28,852 crores, according to data from NSDL. On the other hand, China markets have seen record foreign equity inflows.

Analysts said with China unlocking, a lot of money will move from India. Investors will look for alternatives, given the earnings may not be as projected. And, 2023 is likely to be challenging in terms of FPI flows. Nifty50, at present, is trading at a trailing price to earnings (PE) multiple of 21.6 times which is much higher than its 10-year average.

Last year, the Indian markets stole a march over most global counterparts.

"India’s outperformance over the past year is largely due to troubles in the developed world and China. Going ahead, two pivots — Fed’s (US Federal Reserve's) downshift and relaxation of Covid-19 restrictions in China — could lead to India’s underperformance," Manishi Raychaudhuri, head of Asia Pacific, equity research at BNP Paribas told Business Standard in a recent interview.

Some volatility in the recent weeks is due to anxiety ahead of the Budget and the Fed monetary policy announcements which come on February 1. Markets are usually tumultuous around the Budget. There has been some nervousness as the Fed has sent out feelers that interest rates will remain elevated until inflation in the US slows down to the central bank’s target of 2 per cent.

Moreover, the recent rout in Adani stocks, triggered by a scathing report from US-based investment research firm Hindenburg Research, spooked the Indian market and led to a rise in volatility. It also affected the shares of financial institutions which had exposure in the group.

The report has accused Adani firms of stock manipulation, accounting fraud, and use of extreme leverage, which spells danger for its creditors.

"The decline in Adani stocks had an impact on the broader market. India will be lagging behind its peers in the first half of the year as investors will be more keen to explore cheaper markets," said Andrew Holland, CEO, Avendus Capital Alternate Strategies.