Moneycontrol Pro Panorama | What is holding back Mr Market from breaking free?

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Equity markets opening in the green today may have brought some relief to investors. Even so, the benchmark equity indices have gone nowhere since the curtains opened on FY23. With sharp intra-day gyrations and a mix of good days and bad, the Nifty 50 at 17,392 is somewhat close to where it was on April 1. In fact, the Nifty is currently at more or less at the same level it was back in mid-September last year. That's seven months of marking time.

Why are markets so jittery? This week particularly was marked by the March quarter (Q4 FY22) results from industry heavyweights displaying some weakness. Although revenue expansion has been in-line, cost headwinds weighed down profits. Frontline index stocks such as Nestle, Infosys, ACC and even HDFC Bank have disappointed on the margin front.

With leaders failing to meet estimates and commentary indicating pressure from macro headwinds, risk aversion among investors is rising. The cascading effect is being seen on other stocks too, as investors’ fear that inflation's impact on corporate profitability can be more prolonged and intense than anticipated.

In a recent report, Nomura analysts raised the consumer price index (CPI) inflation forecast to 6.6 per cent year-on-year (yoy) in FY23 from 6.2 per cent earlier (against consensus of 5.6 per cent). This is higher than the Reserve Bank of India’s target forecast of 5.7 per cent. Explaining this, it adds, “We expect inflation will remain above the RBI’s target range of 2-6 per cent throughout FY23, and breach 6 per cent for three consecutive quarters (i.e., breaching the RBI’s legal mandate).”

These problems were sparked by global issues -- the pandemic followed by the Russia-Ukraine war -- that have created supply constraints. For instance, coal shortages at a time when electricity demand in the country has surged and crude prices are ruling high could hamper industrial production and fuel inflation. Commodity prices, be it cement, steel, petrol, diesel, and even agricultural products such as cotton, are on fire. Margin pressure, not just in Q4 FY22, but for a couple of quarters more cannot be ruled out.

But there are contrarians who may wish to believe that these are doomsday prophecies. Their argument could be that economic recovery is holding out well in the normalisation phase emerging from the pandemic. Property sales, credit trends, urban mobility, traffic and toll trends, entertainment, travel and tourism data are all showing steady improvement in the past two months. If this sustains, it may help build conviction on a broad-based economic recovery and growth. Even the International Monetary Fund’s latest World Economic Outlook, published on Tuesday forecasts India’s GDP growth at 8.2 percent for 2022-23, higher than RBI’s latest estimate at a much lower 7.2 per cent.

Even the recent news of a normal monsoon this year, albeit too early to confirm, is a silver lining in the cloud of uncertainty looming over markets. Perhaps, as more Q4 results pour in over the next few weeks, some clarity on the challenges and risks to profitability may emerge. Until then, gyrations in stock prices could well be the norm.

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Putin’s Nuclear Threat Makes Armageddon Thinkable 

Is the Amazon Labour Union a Sign of More Worker Power?

Start-up Street: Does India need more unicorns or democratisation of entrepreneurship?​

Technical Picks: Mphasis, Infy, Castor seed, Tata Consumer, Bank Nifty and USD-INR (These are published every trading day before markets open and can be read on the app)

Vatsala KamatMoneycontrol Pro