Benchmark indices to rise 9% by end-2023 despite slowing economy

Despite widespread expectations of a gradual economic slowdown, India’s stock market, which recently reached a record high, is anticipated to witness an additional 9% increase by the end of 2023, as per market experts surveyed by Reuters. The benchmark BSE Sensex Index achieved an all-time high of 62,887.40, reflecting a remarkable surge of over 23% from the year’s low of 50,921.22 recorded on June 17. Out of the 17 stock indices included in Reuters’ polls, only India’s has reached such historic levels.

The surge in Indian shares can be attributed to increased domestic equity fund inflows from a relatively young population eager to take risks. Coupled with expectations of major central banks slowing down their interest rate hikes, this factor helps explain India’s outperformance compared to both emerging market peers and developed markets.

However, analysts and strategists polled by Reuters anticipate relatively muted gains at least until the middle of the next year. According to the November 15-28 survey, “Resilient growth and… sticky domestic flows all contributed to strong outperformance in 2022. But with a high valuation premium, we could likely see a pause in outperformance even as these factors remain supportive,” said Rajat Agarwal, Asia equity strategist at Societe Generale.

The median forecast suggests that the Sensex is expected to gain only 3.7% from Tuesday’s close to reach 65,000 by mid-2023, further rising to 68,000 by the end of 2023, indicating an overall gain of around 9%. Although the Indian market appears overbought by many measures, with high valuations and record premiums against the rest of the region, analysts remain optimistic about corporate earnings, expecting them to improve over the coming months.

Despite the bullish outlook on equities, Morgan Stanley predicts that Indian markets, which have mainly been driven higher by domestic buying, will underperform their peers in 2023. The broader expectation is that emerging markets will benefit from a more benign global environment in 2023 compared to 2022. However, given India’s trailing outperformance and rich relative valuations, a retracement of relative gains in Indian equities is anticipated, according to Morgan Stanley analysts.

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