Sensex, Nifty has rallied over 18% in FY22; these risks may cap upside in FY23

Lingering concerns over rising inflation, possible escalation of geopolitical tensions from already elevated levels, any slowdown in economic activity and moderation in earnings growth may keep equity investors on their toes in FY23 after a robust 2021-22.

The benchmark equity index BSE Sensex gained 18.29 per cent to 58,568.51 on March 31, 2022 from 49,509.15 on March 31, 2021. Likewise, the 50-share Nifty index advanced 18.88 per cent to 17,464.75 during the same period. Commenting on the further movement of the domestic equity market, Mohit Nigam, head-PMS, Hem Securities said, “The easy part of creating money is over, and now the alpha will come from better stock picking.”

In general, the financial year 2021-22 was highly volatile for equity markets due to events like Covid, the conflict between Russia and Ukraine and inflation, among others. For the financial year 2022-23, Nigam said, “We have a cautious view for FY23. The next 12 months will be highly volatile and the major risk will be a rise in commodity prices which lead to an increase in input cost and most of the companies will face margin pressures that will be reflected in the next few quarterly earnings.”

Select market watchers highlighted that rising inflation will push central banks to increase interest rates in the coming months.

Prasanth Tapse, vice president (research), Mehta Equities said, “We could blame the pessimism or risk in equity markets to concerns of global inflation, risk on corporate earnings downgrades, the slowdown in the global economy, rising US Treasury bond yields and an early policy tightening by the US Federal Reserve.”

Aishvarya Dadheech, fund manager, Ambit Asset Management said, “The market is factoring major parts of the perceived risk of rising inflation, interest rate hike, and surge in commodities prices due to the ongoing geopolitical standoff. The prominent risk investor should be watchful of is, if we see a material slowdown in economic activity or moderation in earnings growth. The other key risk that the market is not factoring yet is if this geopolitical crisis (Russia–Ukraine) gets murkier with more countries or NATO members getting involved. That will slow down global trade and adversely impact all asset classes.”

Dadheech further added that stagflation (slow growth and rising inflation) is engulfing the global economies now and India can’t be an exception.

“However, India somehow is in a relatively better situation. Even after the perceived global slowdown, India still is the fastest growing economy due to the domestic demand resilience. India has so far has done much better on inflation terms and maintained its real rates, compared to other developed and developing countries where real rates are in deep red,” he said.

Richa Agarwal, senior research analyst, Equitymaster added that the liquidity and buoyancy that the market witnessed last year could be affected by Fed planning to hike interest rates and geopolitical events like the Russia-Ukraine crisis and their impact on oil and commodity prices and global trade.