Indian stock markets 2023 set to lose momentum next year as sky-high valuations weigh on market enthusiasm.

Indian equities, which provided a haven from the losses that beset international equity investors in 2022, appear certain to lose momentum the following year as sky-high valuations dampen investor enthusiasm.

This is the general agreement among experts and strategists, who also anticipate that the rupee would perform worse than other emerging-market currencies in general and that the nation’s bonds will gain from its inclusion in important global indices.

Because India has outperformed so significantly over the past 18 months, some of these markets that have become oversold may perform better than India over the next 6 to 12 months if there is a recovery in global growth and sentiment “the managing director of Goldman Sachs Asset Management, Hiren Dasani. However, India would perform far better over the longer run due to the prospect for compounding growth.”

Here’s what to expect from Indian stock markets in 2023:

Valuation Challenge

India has been an exceptional market this year, with the NSE Nifty 50 Index up over 7% in contrast to an 18% decline in world stocks, but it continues to be the most expensive in Asia. According to strategists at Goldman Sachs Group Inc., India’s equities market performance would probably fall behind China and Korea in 2019.

By the end of 2023, Citigroup Inc. expects the Nifty to reach 17,700, almost 5% below where it was on Thursday. The MSCI Asia Pacific Index trades on about 13 times forward earnings expectations, compared to the blue-chip benchmark’s slightly less than 20 times.

“Due to high valuations, we are worried about India, “This month, analysts from Jefferies Financial Group Inc., including Akshat Agarwal, published a note.

However, Citi noted that there has been little cyclicality and that Indian listed companies are skilled at converting economic growth into earnings per share. Despite the likelihood that India may trail any pro-cyclical rallies elsewhere, we applaud this consistent performance “In a recent note, analysts said.

For the same time frame, Goldman Sachs has set a contrarian objective of 20,500 for the Nifty, which is roughly 10% higher.

Rupee Headwind

As investment flows return to emerging markets, the Reserve Bank of India is expected to take advantage of every opportunity to build up its reserve stockpile, a decision that could weaken the rupee.

As it sold dollars to strengthen the rupee and the value of its other foreign holdings decreased, India’s monetary authority saw its reserves fall by $83 billion this year. The currency’s decline to approximately 10% against the dollar has been mitigated by this, keeping losses comparable to those of emerging Asian counterparts.

Goldman Sachs Group Inc. analysts, including Danny Suwanapruti, wrote in a note: “We think central banks that have a low level of reserve stock and/or have seen a significant deterioration in their current accounts, including India, Malaysia and Philippines, will use the opportunity to replenish reserves, thereby limiting the scope for appreciation.”

Goldman predicts the rupee will reach 82 by the end of the year, broadly in line with current levels, while ING Groep NV projects the currency to reach 83 by that time. On Thursday, the rupee was trading at about 82.40 to the dollar.

However, JPMorgan Chase & Co. analysts predict that India’s trading situation would put more pressure on the currency in 2023.

“High energy imports and weak exports are projected to double-squeeze trade balances the next year, “In a note, a group that included Meera Chandan wrote. This influences our choice to hold long on the dollar and rupee.”

Index Hope

Bond holders are hoping that India would be included in international indexes after JPMorgan and FTSE Russell declined to do so this year due to unresolved operational concerns.

In October, global funds made their first sale of index-eligible Indian sovereign bonds in seven months after JPMorgan decided not to include the paper in its measure.

According to Goldman Sachs, inclusion into JPMorgan’s emerging-markets index is imminent and most likely to occur in 2023. Despite steadily rising federal government borrowing, foreigners still hold less than 2% of India’s sovereign debt.

But this rise in debt is also one of the explanations for DBS Bank’s underweight stance on Indian government assets for the coming year.

Due to 2024 being an election year, “fiscal consolidation could be somewhat constrained, and as a result, we estimate GSec supply is to remain relatively substantial in 2023,” said analysts Eugene Leow and Duncan Tan on Tuesday. “Market absorption of the huge supply could be hard,” says the author, “with tighter liquidity weighing on demand from banks.”

Issuance Recovery

The selling of rupee-denominated bonds by Indian corporations is expected to pick up again the following year as issuers switch from bank loans to notes that offer greater savings. According to statistics gathered by Bloomberg, companies have sold domestic bonds worth approximately 8 trillion rupees ($97.1 billion) so far this year, barely changing from the same time last year.

According to Ajay Manglunia, managing director and head of institutional fixed income at JM Financial Ltd., “Bonds will be a preferred route for borrowings next year as the yield difference with banks’ lending rate is widening.” He anticipates that overall sales of rupee bonds could increase by as much as 25% in 2023. Given that the majority of the central bank’s interest rate moves have been taken into account, corporations will start to favour bonds as borrowing costs normalise in the coming year.

In India’s renewable energy sector next year, corporate bonds are preferred by T. Rowe Price and Nomura Holdings Inc. According to a recent paper, some of the factors that contribute to the sector’s “promising investment prospects” include widening yield spreads, ESG considerations, and supporting regulatory actions.

In line with the benchmark earnings growth, “we predict double-digit gains from Indian equities in 2023,” says Naveen Kulkarni, Chief Investment Officer, Axis Securities PMS.

Kulkarni, who has more than 19 years of experience in the financial services and telecom industries, stated in an interview that “earnings growth will be important for 2023 as market valuations are not cheap, considering the NIFTY 50 PE multiple is 1.5x standard deviation above the mean.”

As December draws to a close, higher levels are beginning to consolidate. What do you think about the indian stock market 2023?

In 2023, we anticipate Indian equities will provide double-digit returns in line with the benchmark profit growth. Earnings growth will be crucial in 2023 since market valuations are expensive given that the NIFTY 50 PE multiple is 1.5x standard deviation above the mean.

Compared to the 4% decline experienced in the prior year, gold has outperformed stocks thus far in 2022. Do you anticipate the trend to persist in 2023?

Generally speaking, gold is used as a hedge against inflation. Gold often performs well in an atmosphere with significant global inflation.

The peak of inflation appears to have passed, though, and in 2023, the world’s demand for risk may rise. Gold might not be the greatest asset allocation theme in this situation. As a result, it is more likely that stocks will perform better than gold in 2023.

Rates were increased by 35 basis points by the RBI in December. What trajectory do you anticipate for 2023?

Interest rates are probably about to peak. Depending on the state of the world, we might have another wave of rate increases.

However, while core inflation remains constant, the headline CPI has started to decline. According to this scenario, interest rates might be more stable in 2023.

What industries are most likely to remain prominent in 2023, and why?

Banks will continue to command attention in 2023 due to the sector’s robust loan offtake and cyclical lows for NPAs.

As the CAPEX cycle has started to turn around, the industrial sector will continue to experience strong increases in order books. In 2023, the consumer sector and the auto industry will both have strong growth.

Many PSU banks are gaining ground, but is this growth simply the result of FOMO because institutional investors and most retail investors have very little exposure to the market?

PSU banks are gaining from a number of favourable factors. Profitability and return ratios have dramatically increased as a result of the banking industry having reached a cyclical trough in the NPA cycle.

As the offtake of credit has accelerated, the sector is likewise dealing with difficulties in deposit mobilisation. PSU banks typically have a good CASA ratio and are very good at mobilising deposits.

Given this, PSU banks have a significant capacity for credit expansion, which will result in higher return ratios. PSU banks are still well valued at their current levels, leaving room for stock price growth.

Recently, the price of oil has decreased. What effect will that have on markets and India Inc.’s earnings?

An important issue at the start of the year was the price of oil. Furthermore, increasing GRMs made these problems even worse.

However, falling crude prices are a big plus for India Inc. because they would increase gross margins. From Q4 FY23 onward, the fall in petroleum prices should begin to show in earnings.

Where is the smart money moving? Where in this market can one discover value?

Bank and industrial stock investments are becoming more and more popular. The IT sector, which has enjoyed good returns over the past six months and has outperformed the NASDAQ index significantly over the past year, may also see some movement as a counterbet.

In the past month, FIIs have returned with strong flows into the Indian market. Do you anticipate a change in the flows in Indian stock markets 2023, with more money pouring in?

FII flows are still quite challenging. It is crucial to realize that globally, passive management has surpassed active management. India now accounts for more weight in emerging market indices.

This will be beneficial as 2023’s global risk-on trade develops. Even if the timing is uncertain, major inflows into international equities could occur in 2023, which would be advantageous for India as well, albeit unequally.

How does India’s valuation compare to that of its international competitors?

Indian stocks cost more than their international counterparts. In comparison to the valuation of the developing market index, India is trading at a 90% premium. Around 30% is the long-term average. Indian stocks are currently valued at a considerable premium.

Any three to five lessons that individual investors can apply in indian stock markets 2023 from the year 2022?

The most important lessons learned in 2022 were:

a) Given that certain equities suffer big declines, diversification is essential. Adequate diversification can reduce the impact on the portfolio.

b) Despite the huge problems of the European war, extremely high inflation, and other factors in 2022, stocks were more resilient than they initially appeared to be. Equities managed to reach new highs and generate positive returns throughout the year despite these ongoing difficulties.

c) Never dismiss successful companies.