View: Tug of war in the markets; who will win?

: When to stay out of the market

The government’s focus on growth over populism and fiscal manoeuvring over incremental tax burden gives us the confidence that the growth over the next 18-24 months will be structural in nature, leading to higher tax collections. Having said that, upcoming state elections (particularly in Uttar Pradesh) and LIC's IPO are two domestic events that may suck out the confidence and liquidity of domestic investors.

On the macro side, increasing inflation and, thus, bond yields, would continue to drive EM to DM trades in the near term; which is historically bad for the Indian market. Crude oil is now above $92/barrel. US bond yields have reached a two-year peak of 1.8 percent. And with the announcement of the government's borrowing program, we could see hardening of rates. The Fed is done with tapering and is now talking about a rate hike and cooling down of its balance sheet by a whopping 25 percent. We see little hope for FII inflows unless the valuations become attractive or the macro reverses. FIIs have already sold more than $16 billion since October 2021 and with deteriorating macro, which remains our biggest concern in the short term.

Hence, we anticipate that this year would be a tough one to ride on the success of the last year with stupendous returns. The Nifty has traded in a band of 16-25x, with the current multiple being at 21.6x one-year forward consensus EPS. Fundamentally, while the India story remains intact, in the near term, the markets could witness some correction owing to the macro factors (we expect micro to win over macro in the medium term). Similarly, the upside from these levels seems capped, with incremental and immediate tailwinds in far sight. But in the interim, investors need to be prepared to buy into the fall and focus on quality management with earnings growth over momentum play.

We continue to weigh businesses over stock prices to create the alpha and prefer names like Bharti Airtel, ICICI Bank, Infosys, Maruti, SBI, Wipro and Zomato. We intend to add one cyclical play given the paradigm shift in the Budget but will avoid leveraged name as the cost of debt may get elevated.