"Retail participation in the Indian capital markets over the past two years has been heartening, especially looking at the fact that most investors have either booked a good amount of profits or are sitting on it. Evolved regulation has so far prevented the excesses of boom and the consequent crash from affecting these retail investors. The fact that the Indian markets have been able to withstand FPI selling pressure of $14.6 bn this calendar year due to systematic inflows of EPFO, NPS and SIP is remarkable. India has also seen a rise in activity levels of retail investors.
FPI investors perhaps do not find value in the market and are selling aggressively. They seem to be feeling that valuations of Indian equities still seem to be on the higher side considering the mid double digit earnings growth over the next two years. Indian markets still quote at a steep premium to MSCI EM. However retail investors find value and are buying aggressively. Return expectations of retail investors are shaped by returns of the past 1-2 years and one hopes that the corporate earnings will rise to support this expectation of the retail investors.
Stocks that have done well over the past few quarters include cyclical, capital-intensive, export-oriented and mid/small size stocks. In that respect there is a mixed participation across capital segments and sectors.
India Inc.'s credit health is at its best in a decade on improving demand, government's relief measures and deleveraging efforts by companies according to India Ratings & Research. The share of downgrades to upgrades, it said, is at a decadal low of 0.3 compared with 1.4 in FY21.
After a great FY22, Indian markets could consolidate for first half of FY23. On the one hand, we have tailwinds like resumption in economic activities post Covid disruption, rural economy on the mend, rising commodity prices etc, we also have a lot of headwinds which include high inflation, likely rise in interest rates (and its effect of dragging down P/E ratios) and withdrawal of liquidity, global slowdown due to geopolitical issues and supply chain disruption, and fear of net FPI flows falling sharply due to reversal of carry trade and high rates abroad.
The repercussions of the 2+ years of disruption and the latest war on Indian macro and micro will be clear as we progress during the year. A few second order effects will also be visible, some of which may favour India. Global investors, are still fussing over whether the inflationary pressures would force central banks into aggressive rate hikes, potentially triggering recessions.
Risk appetite of Indians has remained high despite the volatile markets seen lately. It will be crucial to track this closely along with the trend in markets abroad to get a handle on the extent of volatility (upside or downside) expected."