On the runup to Q3 results & budget expectations, the Indian market did well till the mid of January. We strongly outperformed the global market even when the world equity market was weak. This trend was supported by retail & DII inflows.
But as we know the world equity markets are highly correlated now. We have started to bear the consequences of the weak global market from this week. Moving ahead we will follow as per the trend of the global market, actual Q3 results, Budget measures and State elections outcome.
The start of Q3 results was well supported by the good results of evergreen IT sector & commentary. The overall expectation for Q3 is also robust. For example, the Nifty50 index constituents are expected to grow by 25% on a YoY basis.
Most of the delta growth is coming from the Metals & Energy sector due to high international commodity prices, which is expected to moderate in the future as global supply constraints reduce.
This high growth is also due to the low base effect, whereas on a QoQ basis we foresee a reduction in profitability & growth. This is due to high inflation & raw material prices impacting margins and supply constraints affecting demand.
In the coming quarters, we can expect moderation in growth & profitability, which will impact valuations, which is currently trading at the upper hand on a historical basis, limiting headroom.
Union budget comes & goes every year, practically the key important factor is the central government’s financial statement of current & next year.
Most part of the reforms & measures is done outside the budget. And many of the measures undertaken are reiterated & twisted emphasizing the future intentions of the government.
For small taxpayers, it is important in anticipation of relaxations but may not be for the total economy. The crux of the point is that it provides a broad structure of political, economy & fiscal vision.
When we review the short-term pre & post budget performance of the Indian stock market, the correlation & volatility has reduced substantially. However, volatility is high when the budget gets associated with National & State elections, or near global & quarterly result events. Similarly, this time we are close to 5 state elections, starting post-budget, which is presumed to be a precursor of national election stated 2yrs ahead.
Budget will be good for the economy however the Indian market will follow as per the trend of the global market which is weak today concerned about the fast rate of interest hikes by the Fed. FIIs have not yet sold much in the Indian market compared to the weak performance of other EMs. And retail inflows are high today but is highly vulnerable to subside in momentum.
Q3 result growth effect will moderate after the initial strong sectors results. High expectations to the budget are another risk for the market, which is trading at high valuations factoring in many of the near-term upsides. To be stocks & sectors specific will be the bottom line for the investors to sustain & overcome this tricky period.
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