PERSPECTIVE3-5 min to read

Outlook 2023, Indian equities: can market remain resilient?

The Indian economy and stock market held up relatively well in 2022, but challenges are building and valuations appear high.

Indian women in street


Jigar Gandhi
India Investment Specialist

The Indian equity has had a volatile but resilient 2022 in which it has outperformed most global equity markets.

The MSCI India index returned -7.4% up to the end of October 2022, outperforming the MSCI EM (Emerging Markets) index by 22%. India is now the second largest weight in that index, comprising 15.55%, and it is the tenth largest in the global MSCI ACWI, at 1.6%.

India has overtaken the UK to become the fifth largest economy and according to some reports, will become the third largest in the next ten years if the policy stance and focus on growth stays on track. This is a long runway of growth and provides healthy prospects for the equity markets.

Ever-increasing linkage with the wider world meant that the global increase in energy and food prices due to geopolitical tensions impacted India’s macroeconomic picture, but the equity market was resilient on the back of a strong domestic economy and domestic flows.

The inflation impact was softened, however, by government and central bank actions.

The government initiated restrictions on exports of agricultural items like wheat, rice and sugar, which have resulted in price increases for domestic consumers being lower than the surge seen internationally.

Meanwhile the Reserve Bank of India increased interest rates by 190 basis points during the year and continues to suck liquidity out of the system.

India remains an island of growth in a weak global environment

The latest IMF estimates suggest that the Indian economy will grow at 6.1% in real terms, beating other large economies like China (4.6%) and the US (1.0%) in 2023. This is largely due to growth in a strong domestic-oriented economy where exports are only 13% of total GDP.

The domestic economy is also buoyed by the government’s focus on increasing manufacturing and a renewed capex cycle. Wage growth in India has been higher than inflation for the last few years. This has fueled domestic consumption.

Real GDP growth (%yoy)


India is not a manufacturing powerhouse. In fact, electronic imports have replaced gold as the second largest item in the import bill after oil in the last few years. The government is making a concerted effort to increase manufacturing within the country, which will help in the formalisation of the economy, increase employment opportunities, reduce import bills and potentially make India able to be part of the global supply chain.

Some of the initiatives are structural in nature, like land and labour reforms, and may take time to bear results. But other initiatives, like being competitive in tax rates and the Production Linked Incentive (PLI) Scheme rolled out to attract companies, have started bearing results. IT hardware and auto majors have started or announced plans to start manufacturing in India. The “China + 1” strategy, in which companies avoid investing solely in China and diversify their businesses towards other countries. is also helping India as the country offers cheap and skilled labour. Meanwhile, recent signs show that capex as a share of GDP has started inching up after declining from 21% to less than 17% in the last decade.

PLI Schemes announced


Consumer sentiment has bounced back sharply post pandemic fall


Growth in rural areas remains patchy and dependent on monsoons, but strong trends of post-pandemic recovery, above-inflation wage growth and a young demography are resulting in strong domestic consumption in urban areas.

Along with higher oil prices and supply side disruptions, these factors meant an increase in inflation. However, inflationary pressures seem to be largely under control, but remain subject to global energy prices as India imports most of its energy requirements. Crude oil prices are increasingly seen as a barometer of geopolitical tensions and any sustained increase may hurt domestic consumption and in turn the economy.

Also, the Reserve Bank of India has used a large part of its forex reserves to ensure a smooth glide path for the Indian rupee in 2022. While the rupee has depreciated against the US dollar, it has appreciated against other major global currencies like sterling, the euro and the Japanese yen. An increase in the import bill may mean pressure on the currency which will fuel inflation and in turn interest rates.

Inflation seems to be under control for now


INR movement in 2022


Within domestic Indian markets, household savings were being diverted to risk assets like equities in 2022 as traditional assets like real estate and gold were yielding negative to insignificant returns. Fixed deposits were yielding negative real returns. Inflows to equities from domestic investors was close to US$40bn up to October 2022 (including regular savings plans in mutual funds, which accounted for US$18bn of the total), while foreign investors pulled out more than US$20bn. An increase in interest rates may divert some household savings to fixed income instruments again and this remains a key metric to monitor.

Equity market on firm fundamental footing, but valuations remain a concern

Domestic flows in the face of outflows from foreign investors has kept the equity market resilient. Results announced in the latest earnings season point towards strong revenue growth but margin pressures are also visible due to increases in raw material prices. Strong economic growth usually means earnings growth for the corporate world. Earnings growth for the frontline domestic index (NSE NIFTY 50) is estimated to be around 9-10% for the financial year ending March 2023 and around 15% for financial year ending March 2024. The index is trading above its long-term average valuations with a price/book ratio of 3.1x and a price/earnings multiple of 21x based on March 2023 earnings growth of 10%.

Sectors with global linkages like metals and information technology continue to see earnings downgrades in anticipation of a global economic slowdown. Even some domestic consumption sectors are seeing slower-than-expected demand and margin recovery. Results, management commentary and guidance announced by mid and small cap companies are indicating that the valuations in these segments may be stretched. India is currently trading at historically high premiums of over 80% to other emerging markets. This is a key risk in case of any shift of sentiment and/or liquidity to other markets.

Earnings growth estimates of NIFTY 50 sectors


MSCI India trades at historic high relative valuations to MSCI Emerging Markets


NIFTY 50 trades higher than long term averages



Fundamentals and medium-to-long term prospects remain stable for Indian equities. But in the near term they face possible headwinds from oil prices, inflation, interest rates and fund flows. This does not necessarily mean price corrections should be expected, but relative underperformance versus other markets is a possibility.

We maintain our focus on reasonable quality companies with an eye on valuations. The ongoing domestic demand ‘revival’ story remains a key pillar of our investments. While we remain cautious about external headwinds, strong discretionary demand evident from high frequency indicators and stable government policies give us confidence. The market has already digested several negatives and may continue its upward journey albeit with volatility. We will continue to search for and invest in a basket of stock specific opportunities which have the potential to deliver superior performance.

There are always opportunities available for the keen eye.


Jigar Gandhi
India Investment Specialist


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