Which sectors moved equity markets in FY23?

3 Apr 2023 , 09:46 AM

The month of March 2023 was a marginal relief in terms of FPI flows. After seeing combined net outflows of $4.2 billion in January and February; March 2023 saw net FPI inflows of $967 million into equities. However, a substantial chunk of these inflows came from the $1.9 billion investment made by GQG Investments into the Adani group. If that is excluded, FPIs were net sellers on most days in the second half of March 2023. Here is a quick look at the returns on key indices for the month of March 2023 and for FY23 overall.

Sector / Index	March 2023 Returns (%)	FY23 Returns (%)
Nifty 50 Index	+0.32%	-0.60%
BSE Sensex	+0.05%	+0.72%
Mid Cap Index	-0.27%	+1.15%
Small Cap Index	-1.76%	-13.81%

Nifty and Sensex have been flat in March and also for FY23 overall. However, it is the small cap index that has shown deep cuts in March and much deeper cuts for FY23. Clearly, the smaller companies are bearing the brunt of global uncertainty, especially the stress on exports, which is still predominantly driven by smaller sized companies.

Global macros took their toll in FY23

While global macros were an issue in the month of March 2023, a slew of global macro challenges afflicted markets through fiscal year FY23. Here are 4 global triggers that kept the stock markets guessing in FY23. 

• Since March 2022, the Fed had embarked on a tightening spree. With the latest hike of 25 bps in March 2023, the US Fed has effectively raised the Fed rates from the range of 0.00%-0.25% to the range of 4.75%-5.00%. That is a full 475 basis points higher in a matter of just about 12 months. That has put pressure on bond yields and valuations.

   

• It has not just been the rates, but the Fed has also been tightening the liquidity with $500 billion of bond liquidity unwound since June 2022. That led to a slowdown in flows from passive funds, which are not flush with liquidity any longer. That is evident in the persistent selling by the FPIs in FY23.

   

• Global inflation has meant that India suffered from imported inflation due to its huge trade deficits. Despite the Fed raising rates by 475 basis points and the RBI by 250 basis points, the consumer inflation is yet to show signs of coming down. The labour slack riddle is still something that central banks have not been able to crack.

   

• Towards the end of FY23, the global banking system was afflicted by the sudden collapse of Silicon Valley Bank and Signature Bank in the US as well as the forced sale of Credit Suisse to UBS in Europe. That has had a rub-off effect on the Indian markets and is likely to remain an overhang for the financial sector, raising question about valuations.

Overall, global triggers had an oversized impact on FPI flows and the colour of Indian equity markets in FY23.

But, there were domestic concerns too

Even as the global factors hogged the limelight, three domestic factors were also contributing to pressure on the equity markets.

1. Domestic consumer inflation remains the big X-factor, despite RBI raising rates by 250 basis points. While WPI inflation has come down sharply by more than 1,200 bps, it is consumer inflation that remains sticky. That is due to core inflation less willing to move lower. Also, the sub-par Kharif output in 2022 has hit food inflation.

    

2. FPI net outflows for FY23 stood at Rs40,936 crore. This comes on top of Rs122,242 crore of outflows in FY22. The FPI outflows were driven by risk-off sentiments as well as concerns that real returns in the US markets could trigger outflows from EM. For FY23, the good news was that between July 2022 and December 2022, inflows were robust.

    

3. The third big challenge for Indian equity markets is purely in the balance sheet and income statements of Indian companies. In the previous quarter ended December 2022, the input costs were gradually coming under control but interest costs continued to spike. Not only has it hit net profit margins but has weakened the interest coverage.

Effective April 2023, India shifts to a new tax regime and that means less tax burden on the vulnerable sections. That is not to digress from the reality that inflation has caused strains on individual budgets. For now, the focus is on the global banking crisis.

Sectoral leaders and laggards of March 2023

March 2023 was a mixed month in terms of performance. Out of the 16 sectors assessed, 9 sectors gave returns better than the Nifty while 7 sectors gave returns lower than the Nifty returns for the month of March 2023.

Sector / Index	March 2023 Returns (%)
Metals	4.33%
Commodities	3.39%
Oil & Gas	2.98%
Pharmaceuticals	2.30%
Housing	2.17%
FMCG	2.15%
PSU Banks	1.58%
Infrastructure	1.48%
Defence	1.06%
Consumer Durables	0.24%
Private Banks	0.15%
Realty	-1.49%
Digital	-1.57%
Logistics	-2.73%
Information Technology (IT)	-3.25%
Automobiles	-3.83%

Data Source: NSE (shaded sectors outperformed Nifty-50)

Here are some key takeaways from the March 2023 equity market performance story.

• Metals and commodities were the star performers of March 2023 and that was quite obvious. With an expected opening of Chinese markets, the bet is on a surge in demand for metals and commodities. Among other smart performers in March 2023 were oil & gas, Pharma, Housing and FMCG, all yielding over 2%. Oil & gas benefited from the surge in Reliance and stabilizing crude prices. FMCG and Pharma were defensive plays, while housing stocks benefited from the high demand for housing units in March 2023.

   

• Let us turn to sectoral laggards. Automobiles and IT were the worst hit in March 2023 due to their strong global linkages. They were expected to be hit by the global banking crisis. Also, digital stocks continued to take it on the chin while logistics segment saw pressure on account of weak trade performance.

Overall, the Nifty ended March 2023 on a flat note, but the range of sectoral returns were rather diverse in the month.

Sectoral leaders and laggards of fiscal year FY23

FY23 also saw a diverse performance by sectors, despite ending the year 60 bps lower. Out of the 16 sectors assessed in FY23 fiscal, 7 sectors gave returns better than the Nifty while 9 sectors gave returns lower than Nifty returns.

Sector / Index	FY23 Fiscal Year Returns (%)
Defence	48.59%
PSU Banks	36.34%
FMCG	26.50%
Automobiles	16.03%
Private Banks	11.93%
Logistics	9.74%
Infrastructure	1.44%
Housing	-1.93%
Commodities	-7.36%
Oil & Gas	-9.12%
Consumer Durables	-11.44%
Pharmaceuticals	-11.54%
Metals	-14.42%
Realty	-16.44%
Digital	-20.00%
Information Technology (IT)	-20.98%

Now, for some key takeaways from the FY23 equity market performance.

• Let us start with the FY23 sectoral gainers. Defence was the big story with 48.6% returns in FY23 on the back of solid order flows. PSU banks gained 36.3% in FY23 on the back of loan yields growing faster than cost of deposits. The other two big sectoral performers were FMCG and autos, where the buying was largely defensive in the year.

   

• Among the laggards, there are no prices for guessing. IT and digital were the sectors at the bottom rung due to the global slowdown and tech spending concerns. Even realty and metals were tepid for FY23, as were consumption driven sectors like consumer durables and FMCG.

Overall, the Nifty ended FY23 marginally in the red. However, the budget euphoria which had started in February, did not sustain due to the negative impact of the sell-off in Adani stocks and the global banking crisis. It looks like FY24 may continue to see headwinds.