Health of Your Wealth APR '23

1.

Both Foreign and Domestic are Bullish: FIIs and DIIs… Net Buyers

Both FIIs & DIIs are bullish on Indian equity in Mar and Apr 2023.

IMPACT: POSITIVE

Remarks: As of March, and April 2023, both FIIs & DIIs were net buyers in the Indian equity market. FIIs invested a net amount of approximately Rs.19.5k Cr, while DIIs invested around Rs.32.7k Cr during this period (Mar + Apr).

Historically for the past 18 months, FIIs & DIIs tend to contradict each other – one buys, another sells. But the current positive sentiment of both FIIs and DIIs indicates strong confidence in the Indian economy and the potential for long-term growth.

2.

Growing Earnings, Stagnant Market: A Disconnect that Leaves Investors in the Wait

The overall EPS of nifty has grown by ~35% since the market peak in Oct, 2021, but the market has gone nowhere.  

IMPACT: NEUTRAL

Remarks: The data suggests that since October 2021, the Nifty forward EPS estimate has been upgraded by ~35%, while the Nifty index has remained stagnant. If we assume that the market would follow the same forward PE ratio as of October 2021, the Nifty index would have been at around 24,000 level currently. However, it is important to note that the market was highly overvalued during October 2021, and the current 1-year forward PE of 19.2x is in-line with its 10-year average.

The current state of the market suggests that it has reached a level of valuation that is reasonable, with neither the excessive overvaluation seen in October 2021 nor the undervaluation observed in March 2020.

3.

Q4 FY23 Results are in-line with the Expectations so far!

Results of 21 (Total 50 companies in Nifty) companies are declared and most of them are meeting / beating expectations.

IMPACT: POSITIVE

Remarks:

The results of 21 out of 50 companies in Nifty have been declared, with most of them either meeting or beating market expectations. However, since this outcome was already priced into the valuation, there may not be any positive surprise for investors, and as a result, a rally in the market may not be seen solely based on these results. Further, since there is NO negative surprise either, the downside is not going to be significant as well.

4.

Shifting Sands of Savings: US Depositors Migrating from Bank FDs to T-Bills

Rise in the FED rate attracting more depositors towards T-Bills. Bank FDs have become less attractive in the US.

IMPACT: NEGITIVE

Remarks:

Due to the rise in the FED rate, US depositors are finding Treasury Bills to be more attractive than Bank FDs. Current FED rate is ranging between 5% - 5.25% in the US whereas deposit rates ranging from 0.05% - 4.50% (approx.) As a result, many depositors are rebalancing their savings portfolio by moving away from Bank FDs, which have become less attractive in the current market environment.

This shift in investment patterns among the depositors in the US has resulted in a ripple effect throughout the country's banking system, and it is necessary to monitor any further consequences closely.

5.

FED Tightening: The Double-Edged Sword of Economic Growth

Historically, the FED rate hike led to financial crisis during the peak of the rate hike, leading to market turmoil.

IMPACT: NEGITIVE

Remarks:

When the Fed Reserve raises interest rates, it is normally to cool down an overheating economy or control inflation. However, these rate hikes also have unintended consequences. In fact, historical data shows that financial crises have often occurred during the peak of a FED rate hike. This is because rate hikes can cause borrowers to default on their loans, leading to a domino effect of financial stress throughout the economy. 

Basically, FED rate hike has caused many financial crises directly or indirectly. Although the reasons are different, the crises have always happened during peak of every rate hike cycle, and these crises are always a “known unknown”.