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2023: Tailwinds amidst headwinds…

Updated: Jan 9, 2023

Greetings from Team Carnelian!!!

We wish you and your family a Happy New Year!

As we reflect upon the year that has gone by, like we had stated 2022 was a year of de-rating and modest earnings growth (link) with challenges like rising interest rates and inflation to be watched out for. Nifty EPS grew by 10.5% over the last year; however, contraction in multiples led to almost flat returns at Nifty. The great news is that the Indian markets have outperformed the global markets by a steep margin, which speak volumes about the India story.

As we step into 2023, we carry a mixed sense. On one side there are headwinds playing which might have significant implications and at the same time there are significant tailwinds to the India story both in the medium and long term. The co-existence of these contradictory factors makes us cautiously optimistic about the markets. Both the tailwinds and the headwinds will play out. With the interest rate increase, Nifty market valuation is in the fair value zone and whenever the markets are in the fair value zone and mixed factors are at play, it is bound to create some volatility.

Let’s look at the headwinds and the tailwinds.


Globally, the world is currently grappling with some of the “known unknowns” - which are important to ponder upon. Some of the important ones are:

  1. Recession fears & impact on global demand

  2. QE withdrawal and high interest rates

  3. Geo-political issues

  4. Covid resurfacing

Domestically, few risks that one needs to be cognizant of are:

  1. Emerging political scenario in India as 5 large states are going into elections in 2023 followed by central level elections in 2024

  2. Potential re-emergence of imported inflation due to high commodity / energy prices as China opens up

  3. Re-emergence of trade deficit leading to currency volatility

  4. Slowing down demand scenario


  1. Manufacturing Shift

  2. Unlevered Balance Sheets

  3. Beginning of private capex cycle

  4. Massive investment in Infrastructure development

  5. Fund flow towards emerging markets to remain buoyant – India still underinvested in global portfolios

Let’s delve a bit deeper:

Recession & slowdown in demand:

The most important point to ponder upon is - can inflationary overheating be reversed without a slowdown? The outlook for the US economy for 2023 has dimmed over the last year. In November 2021, the SPF consensus expected GDP growth to average 2.6% in 2023 which is now revised to 0.7%. Also, in November’s press conference Fed Chair Jerome Powell acknowledged that the path to soft landing has narrowed. There is a very high probability that there would be a slowdown in USA, UK and Eurozone and India cannot be unscathed as our exports to these economies will also be impacted.

Withdrawal of QE & Rising Interest Rates:

Central banks in most major economies have been tightening the cycle by raising interest rates and unwinding balance sheets. The US Fed has increased fed fund rates from the range of 0.0% - 0.25% to 4.25% - 4.5% over the last 12 months (steepest increase in 4 decades!!). Also, it has started unwinding its balance sheet from USD 8.9tn by a ceiling of USD 47.5 bn a month, which further increased to USD 95 bn a month from Sep 2022 onwards. ECB also started increasing interest rates, and just within a span of 4 months it raised it to 2.5% vs 0% in Jul 2022.

An increase in interest rates will lead to a decrease in discretionary spend, impacting demand.

Unwinding of the balance sheet will make capital scarce as compared to the last 2 years. This will surely have an impact on the investment cycle in the short term. Moreover, unintended consequences of liquidity widening are always a big risk.

While we think the peak of inflation & interest rates is behind us (link); however one should always keep in mind that the increase in interest rates impacts demand with a lag. In 2023 we may see that. Extent and pace will determine the policy makers response.

De-Globalisation & Geo-Political Issues:

We are in an era of deglobalization, or localization and the ongoing Russia Ukraine war has only escalated the situation. We are in the middle of a heightened proxy war between the US and China on global supremacy. This is likely to keep resurfacing through both economic and military conflicts in one or the other form. Global peace of many decades post USSR seems to be behind now.

It is very difficult to ascertain the impact of the on-going war. Even more to make a guesstimate as to when will it eventually end. But it’s for real and must be kept in mind while investing.

Covid Resurfacing:

China has seen a surge in covid cases ever since it relaxed restrictions. Covid relaxation will surely open demand for Chinese economy, but the spread of virus can lead to intermittent issues leading to a supply chain disruption until China achieves mass immunity. We will know the real impact only as the year progresses but as of now – it is surely an uncertain event.

Let’s switch our discussion to some of the domestic issues which will keep market volatile:

Domestic state election would set the trend for general elections in 2024

In 2023, there are state elections in key electorates such as Karnataka, Madhya Pradesh, Rajasthan, Telangana, Chhattisgarh, and a few north-eastern states. This would keenly be watched as a semi-final for the upcoming National elections in May-2024. This could keep the markets nervous. We witnessed this kind of anxiety in 2018 also, when markets were mostly sideways and turned volatile around those elections. Of course, 2023 is far-clearer than 2018 in terms of BJP’s strength; however, politics like markets is always uncertain.

Resurgence of Inflation:

Post-impacting margins, commodity costs cooled off from their highs. However, global supply chain issues can inch up inflation again. Though we do not see this as a permanent/sustainable risk, markets will remain worried about it.

Re-emergence of trade deficit leading to currency volatility:

We have witnessed a sharp increase in CAD in recent times (4.4% of GDP for Q2 FY2023 vs 2.2% of GDP for Q1 FY2023). Rise in the CAD is due to the trade deficit reflecting impact of slowing global demand for exports, despite a robust growth in services exports and remittances. While structurally in the long term it may not be a worry but in the short to medium term it will have an impact on the currency.

Slowing down demand scenario:

While India remains a promising consumer market, our channel checks and some data points suggest a slow-down in demand for consumer goods across both discretionary and non-discretionary in the short term. We see this as temporary and could impact market performance through the year.


Now let’s turn to tailwinds for Indian markets/economy

  1. Manufacturing Shift

  2. Unlevered Balance Sheets

  3. Beginning of private Capex Cycle

  4. Massive investment in Infrastructure development

  5. Fund Flow towards Emerging markets to remain buoyant – India still underinvested in global portfolios

Manufacturing Shift - India is the deflationary engine to global inflation

Amidst all the gloom and doom we discussed above; India is the deflationary engine to global inflation. We have already discussed in our earlier letters about the drivers of the decadal opportunity for “Indian Manufacturing” (link). India’s improved cost competitiveness, government support, China +1, infrastructure upgrades, skilled labor all are enablers for India to play a big role in the global deflationary cycle which was played by China in the last 3 decades. India’s manufacturing GDP will double in next 5 years and will offer sizeable opportunity. We remain very bullish on this theme and will use every volatility as an opportunity to get exposure to this subject.

Unlevered Balance Sheets and beginning of private capex:

Corporate balance sheets have lightened on account of deleveraging and pick up in utilisation across sectors. Order inflows of capital goods companies continue to be robust. This offers protection in an uncertain environment and growth opportunity for future. Dry powder with corporate India is huge positive.

Source - RBI

Massive investment in Infrastructure development:

As discussed above, capex spending by the government has hit all-time high. Further, the government has made huge holistic investments across roads, railways, logistics, ports etc. which has only increased year on year in the budgets and should continue to accelerate further from here in the current budget considering the upcoming elections. In the 2022 budget, for FY2023E, the government increased overall capital expenditure by 10% to INR 12.2tn; with higher allocation for Railways (+14% YoY) and new and renewable energy (+32% YoY).

India best positioned to absorb growth capital:

India is best positioned to absorb the growth capital of the world as the growing size of the economy offers attractive investment opportunities along with depth. In our recent letter to investor (link), we outlined that once the US fed tightening cycle is over, the dollar starts depreciating and EM typically start receiving flows again. Moreover, India is still underrepresented in global portfolios, and we see positive fund flows from FPIs in 2023.

Corporate earnings cycle just getting started:

India's corporate earnings have rebounded strongly, and this resilience should continue to remain. We are in the middle of a corporate earnings growth cycle. Corporate earnings growth should remain in the range of 10%-15% depending on the global environment.

Banking, IT, Capital Goods/industrials should provide decent earnings growth.

Source - Bloomberg


Markets will be positive but could be volatile through the year as Headwinds and Tailwinds both play out. Both Bulls and Bears could be proven right.

India remains one of the most promising markets and will attract capital, thereby providing downside comfort.

Betting on the right sector, right company and right management team will continue to remain important. All our efforts and energies will be focused on that.

We advise our investors to view the current state of the situation from an investor’s lens rather than the traders’ one, as investing amidst volatile periods offers the best compounding opportunities.

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