Top 5 trends to watch for stock markets in India in 2023

6 Feb 2023 , 01:47 PM

In the calendar year 2022, India was the top performing market by a margin in terms of annual returns. In fact, India was among the handful of markets, apart from Brazil and Indonesia, to give positive returns in 2022. India benefited from a more resilient economy, a robust reforms package and the possible emergence of India as the manufacturing choice for the world. However, markets in year 2023 are likely to be driven by some key trends. 

We look at five trends that could shape the stock markets in India in the year 2023. A couple of factors are purely macro while one trend is sector specific. Our last two trends for 2023 are purely market infrastructure driven. It is hard to talk about bulls and bears in the market in 2023, but one this is absolutely certain. Indian markets are likely to emerge smarter and stronger in year 2023.

Interest rates will continue to rise

If rising rates was a challenge in 2022, it is likely to continue in the year 2023 too. However, the rate hikes are likely to be relatively more sober. For instance, the US Fed is pencilling in 3 more rate hikes of 25 basis points during the year and expecting rates to peak after that. In India, another 50 bps rate hike looks likely overall, but a lot would still depend on the US rate movements. Above all, a lot will would still depend on how inflation pans out.

For now, it looks like inflation is coming down, but it is likely to be a lot more volatile. With the Russia Ukraine war still on, the supply chain constraints are going to continue. Also, labour data is still quite strong so inflation will only fall gradually. And as long as inflation remains high, interest rates are not coming down in a hurry. Rising rates have never been a favourable scenario for equities since it makes debt more attractive and increases financial risk for Indian companies. This is the macro environment Indian markets must live with.

Gold will compete with equities

Gold was not a very favoured asset class in 2022, but things could change in 2023. There are three reasons that could drive the interest in gold, as a competitor to equity, in the year 2023. Firstly, with the Russia Ukraine war still on and China indulging in sabre rattling, the geopolitical situation is still very fluid. That means; the safe haven demand for gold is likely to come back in a big way during 2023. The second factor favouring gold will be a gradual tapering of the US dollar.

Year 2022 was marked by a persistent strengthening of the US dollar. With Fed consistently raising rates, the US dollar was the obvious beneficiary. That dampened the gold prices since gold is expressed in dollar terms. Year 2023 is likely to be different. The US rate hikes are likely to top out by mid-2023 and that is already evident in the US Dollar Index (DXY) tapering from the highs of 110 levels. This would be the second factor favouring gold.

Thirdly, gold is also likely to benefit from the unravelling of crypto as an asset class. It is not just about Bitcoin prices crashing. It is also about how cryptos could become almost unviable when the world is going through an energy crisis. It is also about the number of crypto exchanges that have gone bust in the year, sinking a lot of money with it. These factors will once again make a case for good old gold as a competing asset class.

Focus on Defence stocks

In the Indian markets the big story is likely to be on domestically driven stocks. The reasons are not far to seek. Global economies are struggling and already the US, UK and the EU are expected to get into recession. Hence export oriented sectors and globally exposed sectors will have a major problem in 2023. The focus would be on sectors and stocks that are largely domestically inclined; and one such sector would most likely be defence. 

Globally, defence stocks are attracting a lot of interest as the world appears to be in a state of perpetual strife. However, the story in India is somewhat different. There is a huge domestic defence demand that can be moved from imports to domestic manufacture. The current PLI scheme, coupled with other incentives, could be a game changer for Indian defence. We have only scratched the surface on prospects for exporting defence equipment to other third world countries. Defence may be the big market story for 2023.

ASBA in secondary markets

Notwithstanding the objections, it looks like ASBA (Applications Supported by Blocked Amounts) is coming in secondary markets too. Now, ASBA has been a big hit in IPO markets because the funds don’t get debited on application. Instead, the funds only get blocked. On the date of allotment, based on the number of shares allotted, the amount is debited and the lien on the balance amount is freed up. The investor does not lose interest and avoids the hassles of waiting for the refunds to come in.

SEBI is now quite keen to extend this facility to secondary markets too. That means, broker float is likely to be impacted. The funds would directly move in and out of the client accounts without touching the broker accounts. This is likely to prevent extremely risky cases like Karvy where the broker misused the funds of the investors. What this could mean is that brokers would be only required to focus on the execution and advisory roles.

Not everyone is entirely pleased with this move. Most brokers have protested that this move could favour 3-in-1 accounts of bank-sponsored brokers. They have also cautioned that such a move would increase the cost of trading for the investor. These are early days still, but the move to ASBA in secondary markets is likely to happen sooner, rather than later. Its impact on the stock broking industry is going to be substantial.

Age of the algorithmic investor

Perhaps, algorithmic investors may be a very specific term, but what we imply here is of the automated investor. With markets volatile and alpha being hard to come by, investors are likely to increasingly look at smarter functions like algorithmic trading, AI based trading, Rule based trading, passive trading etc. Algorithmic trading is already on and this year will see a more comprehensive regulatory framework on algo trading from the regulator.

The concept of algorithmic investor is also likely to extend to the larger aspect of personal financial planning. One can expect more of robo advisory, robo selling and robo based asset allocation happening. In short, investors are likely to look at less of manual intervention and more of intelligent algorithms for their investing needs. The challenge would be to give a human touch to these algorithmic solutions. Year 2023 promises to be interesting and challenging for the stock markets, nevertheless.