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India Inc News: India Inc earnings could get worse before better from second half of 2023


Most of the world’s stock markets in 2022 will yield negative returns. The MSCI World Index is down ~20%, the NASDAQ is down more than ~30%, China ~25% and India in dollar terms ~10%. The main reasons are (a) The war is going on for a long time; (b) Interest rates increased sharply; (c) Inflation rate stabilized (finally started to decline); (d) Reduced liquidity. However, many of these parameters are expected to change in 2023, especially interest rates and inflation levels, but businesses Profitability There is also the possibility of pressure.

Two major issues investors are grappling with (i) Rate Expectation Repricing and (ii) Rate Readjustment income Expected.

Is a year-end revaluation a token consensus?

At the beginning of December 22, two views reached consensus in the market:

Fed uptrend;

Loosening China’s Zero-COVID Policy leads to a rebound in China’s growth.

Both of these aspects are expected to support the global market and economy in 2023.

Over the past two weeks, a cloud of ambiguity has surrounded these consensus views as we head into January 23.

Ahead of the Fed’s December 14 meeting, with two consecutive inflation readings surprising positives, markets are starting to price in the direction Fed uptrend – pro-growth versus anti-inflation – for 2023. Chairman Powell’s widely aired speech on November 22 showed a gradual pace of rate hikes, further reinforcing these expectations, with the market even pricing in two rate cuts in 2H-23. During the December 14 Policy meeting and the Press Conference that followed, Chairman Powell emphatically denied dovish expectations. Powell reinforced the following messages – No rate cut in 2023, Rate of rate hike is less important in the future than Final Rate, Term of Rate Final and Fixed Tightening quantity is taking place. This led to a correction in the stock market.

In our view, if the inflation index continues to surprise positive in Q1-23, the Fed could pause around 5%. From Q2-23, the base effect will come into play and inflation indicators will decrease significantly.

With the rapid rise of COVID in the Chinese population, global fear around the spread of the BF7 variant of Omicron is creating uncertainty. This could also slow down the pace of China’s reopening after the Zero-COVID policy. Despite the reopening, it is important to monitor the nature and scale of the stimulus measures administered by the Chinese Government.

What could such consensus recalibration mean for the earnings cycle?

While macro indicators suggest that the global economy is slowing, the risks appear to be increasing to the downside in 2023. demand slows. As supply chain restrictions are physically eased, rising inventories are likely to put pressure on final market prices when demand is moderate.

As negative operating leverage kicks in, during the first half of 2023, we could expect to see earnings decline due to a worsening macro backdrop. With recession risks rising and the earnings cycle continuing, global equities could experience extreme weather in the first half of 2023. However, we are optimistic that the cycle bottom will pass in Q. 2/Q3-23, with inflation largely within the comfort zone of central banks, China’s significant easing of Covid-19 restrictions in Q2 could support the rehibilitate.

Up until now, the consensus earnings downgrade has been mainly due to margin constraints rather than weak revenue. In India, non-financial margins, Q2 FY23 fell ~500 bps. This means that, so far, companies have had more cost problems than demand problems. If the downturn turns out to be deeper than the market currently anticipates, the revenue adjustment will also turn negative.

What do we have for India?

As 2023 rolls around, key investor debates will focus on falling commodity prices contributing to a positive earnings adjustment rather than weakening demand affecting revenue. Earnings environment could get worse before getting better from 2H-23. In a hostile global environment, India should continue to benefit from economic resilience and falling oil prices. Portfolio cash flow over the past 6 months has pushed valuations higher than World and Emerging Markets. Depends on how cyclical growth progress, India valuation fee will grow accordingly. Key risks for India remain – Oil Price, Current Account and INR.

*Author, Vinay Jaising, is MD, Portfolio Management Services, Services)

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