market outlook: why value stocks are likely to outperform growth stocks in the near term

Markets greeted the new fiscal year with high spirits as Nifty broke through 18,000 levels. Although the rally did not persist over the week, questions over benchmark valuations and investing in value stocks started to make the rounds as Nifty rebounded around 15% from March lows.

Over the past two years, markets have reached new highs, with the MSCI Value Index registering gains of around 90% and around 16% respectively in FY21 and FY22, compared to the MSCI Growth Index, which rose about 56% and about 17%. . This indicates a clear outperformance of the Value index compared to the two previous years. Now, the real question for market participants is which theme can dominate in FY23 – growth or value?

From where we are today, interest rates have bottomed out and a series of rate hikes await us. Rising inflation and rising interest rates will only cause bond yields to soar. Over the past decade, there has been a positive correlation between bond yields and the performance of value stocks, as during periods when the yield on 10-year government securities rose, the MSCI Value Index rose. also rebounded. Similarly, in periods of declining 10-year bond yields, the value index has fallen significantly. Furthermore, the current macro-dynamics, especially supply disruptions, soaring inflation and potential drop in demand can, to some extent, undermine business growth.

Given the robust recovery since the pandemic, lofty growth expectations have already been priced into equity valuations. Even a minor failure to meet these expectations can have a magnified impact on the stock price and lead to downward earnings revisions. While the upcoming quarterly results will be key in determining which trend may dominate, the factors set out above suggest that value stocks are likely to outperform growth stocks, at least in the short term.

Event of the week

The consolidation of the Indian financial sector has just given a continuation. Unlike the first part which was led by the public sector banks where the industry saw a series of mergers, this time however it is the private sector players. On Monday, HDFC Bank announced the merger with its parent entity HDFC Ltd in a bid to improve its housing loan portfolio, increase its customer base and provide HDFC Ltd’s portfolio with access to low cost of funds.

This news came as the echo of Axis Bank’s acquisition of Citi’s retail business was still audible. These mergers have a wider implication for the sector rather than just an increase in competitive intensity. New players may struggle to maintain momentum, as offering higher interest rates on deposits may not be a sustainable long-term option. Moreover, after the RBI tightened non-banking standards, NBFCs now face regulations almost on par with banks. These factors may further propel mergers and acquisitions in the financial services industry.


Technical outlook


The Nifty 50 index closed on a positive note but faced a strong rejection at 18,100 levels as selling pressure mounted. The index has formed a shooting star candlestick pattern at channel resistance off the all-time high, which suggests a slowing in bullish momentum. Similarly, both US and European indices are setting a lower high. That said, their short-term trend is still bullish. Against this backdrop, we suggest traders maintain a slightly bullish outlook as long as the Nifty does not drop below 17,600 levels. Immediate resistance is now placed at 18,100 levels.

AND CONTRIBUTORS


Expectations of the week


While global investors will be watching inflation numbers closely in the US and China, India’s consumer price index will be a key domestic factor to watch. The number is expected to be north of the RBI tolerance limit, but a higher-than-expected inflation spike may cause some knee-jerk reactions.

Additionally, Indian IT companies will be in the spotlight as the leaders report their fourth quarter results. While revenue growth in IT companies is likely to slow sequentially, margins, revenue forecasts, and attrition numbers will be crucial indicators to track. Given macro factors and the start of the earnings season, volatility will be high in the truncated week ahead. Investors are therefore advised to invest in resilient stocks that offer a reasonable risk/reward ratio. Nifty50 closed the week at 17,784.35 up 0.64%.

Garland K. Long