Back to Square One: Nifty circles back to levels last seen in September 2021, markets likely to end 2023 in the red

• Equity markets have shed all the gains they clocked since August 2021, as Nifty50 continues to languish at 17,000 levels.
  
• Factors like geopolitical tensions, elevated inflation and higher interest rates have dampened investor sentiment.
  
• Nearly 4% of the 6% decline in Nifty50 has taken place since March 8 when the US-based Silvergate Bank collapsed.
  
• Analysts suggest that Nifty50 could end up delivering negative returns in 2023 amid uncertainty in the short-term.
  

Indian equity markets have lost all the gains they made since touching the 17,000 mark for the first time at the end of August 2021. Factors like geopolitical tensions, elevated inflation and a higher interest rate regime has dampened investor sentiment towards equities.

As a result, the benchmark Nifty50 index is back at the 17,000 level, erasing all the gains made from September 2021 to date. This is in stark contrast to the returns of over 23% that Nifty50 delivered between January and August 2021.

Nifty50 could deliver negative returns in 2023

The Nifty50 index, which was at 18,200 at the start of 2023, could end up delivering negative returns this year due to the banking crisis in the USA and Europe.

Strategists at the Bank of America have trimmed the target for Nifty50 by nearly 8% from 19,500 to 18,000 by the end of 2023. It now expects Nifty50 to trade between 16,000 to 18,000 due to an increase in volatility on account of the banking crisis.

For context, India VIX, short for Volatility Index, is currently at 15.08, and has risen by nearly 24% in March so far.

Nearly 4% of the 6% decline in Nifty50 has taken place since March 8 when the US-based Silvergate Bank collapsed. Since then, Silicon Valley Bank, Credit Suisse, and First Republic Bank have also fallen.

BofA Global now expects Nifty50 to trade between 16,000 and 18,000 due to increased volatility on account of the banking crisis.

Analysts divided on volatility

According to Shrikant Chouhan, head of equity research (retail) at Kotak Securities, geopolitical tensions and the banking crisis in US and Europe will result in “uncertainty remaining for the next six months, keeping equities under pressure.”

“The short term sentiment will remain depressed and it will take some time to get clarity on what is happening in the US. At least for the next one quarter we need to see how these US banks perform,” Chouhan told Business Insider India.

In addition to it, the prediction that the 2023 monsoon will remain below average may hit the market in the near term.

“This year the prediction is that the monsoon will remain below the average level. So till clarity comes, which normally we get at the end of June, it maintains downward pressure,” said Chouhan.

Striking a contrasting note, however, Deepak Jasani, head of retail research at HDFC Securities told Business Insider India that there could be a relative decline in volatility going forward.

“I think markets will be less volatile in the next one year than they are right now or were in the past because the worst seems to be behind us,” added Jasani.

Off to a bad start in 2023

While Indian equity markets were amongst some of the most resilient ones globally in 2022, they have been off to a bad start in 2023. The Nifty50 index has declined by 6% till date.

Expensive valuations compared to other markets and now the banking sector crisis in the US and Europe have contributed to a sharp selloff by foreign institutional investors (FII), who withdrew ₹52,555 crore from Indian equities in the first two months of 2023.

“Recently, in the first few months of 2023, we underperformed global markets because our valuation was extremely expensive compared to Asian and developed markets,” Chouhan added.

FII selloff to slow down in 2023

Analysts at BofA Global expect the pace of FII outflows to slow down in 2023, which should provide relief to the markets. Domestic flows, too, are expected to remain healthy at $20 billion (approx. ₹1.64 lakh crore).

“We estimate $20 billion of passive domestic inflow via provident, pension, insurance funds and SIPs – mostly invested in Nifty/Sensex ETF – could provide support to large caps,” said the BofA report.

According to data from the National Stock Exchange (NSE), FIIs pulled out ₹4.2 lakh crore from the Indian equity markets from September 2021 till date. In the same period, domestic institutional investors (DII) have pumped in over ₹4.07 lakh crore, helping support the markets at a time of record FII outflows.

Essentially, DIIs have invested ₹97 for every ₹100 pulled out by FIIs. This is also visible in the ownership of DIIs in listed Indian companies, which stood at 22.37% in September 2021 and increased to an all-time high of 24.44% in December 2022, according to data from Prime Database.

BofA Global noted that it is bullish on sectors like financials, autos, industrials, cement and steel. There is also a consensus amongst analysts that Indian banks are also better placed than their US and European peers, due to attractive valuations and stickier deposits.

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