Sector Leaders and Laggards in December 2022

Here is the Gist of the December Stock Market Story

The month of December 2022 was a month when the markets struggled to hold on to higher levels. While FPI flows remained positive in December 2022, it was the hawkish sentiments coming from the US Fed and the RBI that spooked the markets. The markets were down sharply in December as much of the correction happened in the second half of the month.

The fall in December comes after 2 successive months of impressive performance by the Nifty. For instance, Nifty had gained 5.37% in October 2022 and another 4.14% in November 2022. In contrast, December 2022 saw Nifty fall -3.48% with selling across most sectoral indices. While mid-caps and small caps ended with negative returns of -1.65% and -2.45% respectively, alpha hunting in smaller stocks was visible.

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Macro triggers drive Nifty fall in December 2022

After two successive months of rally in the Nifty, December saw Nifty falling by -3.48%. The biggest factor in this fall was the macro hints coming from the central banks, but the December effect also played out as most of the institutional investors preferred to stay on the sidelines while traders opted to go into the year with much lighter positions. Here is the gist of the December stock market story.

1. In the December 2022 Fed meeting, the pace of rate hikes was reduced from 75 bps to 50 bps, taking rates to the 4.25% to 4.50% range. That was along expected lines. However, what spooked the markets was the tone of Jerome Powell in the statement. The Fed chair underlined that the terminal rates would be closer to the 5.25% mark. That paves the way for another 75 bps of rate hike, possibly in 3 tranches of 25 basis points each.
2. It was not just the hawkishness of the Fed, but even the strongly hawkish stance of the RBI that had an impact on Indian markets. The MPC minutes indicated that RBI was unwilling to relent on inflation control. RBI has also hinted at another 50 bps rate hike from here, possibly in 2 tranches. Higher interest rates would mean a higher cost of funds; and the interest coverage ratio had already deteriorated in the Q2FY23 quarter.
3. FPI flows were positive, once again, in December but nowhere close to the aggressive flows seen in November 2022. For December 202, the total net FPI equity inflows stood at Rs11,120 crore or $1.36 billion. However, the debt segment saw outflows to the tune of Rs1,945 crore. What about annual FPI flows? For the year 2022 overall, net FPI outflows were to the tune of Rs121,440 crore or $16.5 billion. FPI selling in equities was focused in H1-2023, with positive flows seen in the second half of the year.
4. There was also the December effect or the year-end effect that played out in the markets. What exactly is this December effect? Normally, the last two weeks of December represent the holiday period, when FPI action is tepid. Most fund managers have estimated their performance and do not want nasty surprises. Hence they tend to operate from the sidelines. In the case of domestic traders, many have decided to go light into 2023, ahead of the plethora of headwinds that the global economy is facing.
5. Away from the world of economics and stock markets, there is the return of the COVID monster visible in some countries. China, Japan, South Korea and Thailand have seen a spike in COVID cases with the latest BF.7 variant. While India has put some basic checks and balances, the situation is not as serious as it was in 2020 or in 2021. Ironically, China is planning to relax its zero-COVID policy exactly at this point of time. The repercussions of this move is something the global markets are observing with bated breath.

December 2022 was saved by metals and PSU Banks

Data Source: NSE

Let us first focus on the 5 sectors that did better than the Nifty in terms of monthly returns. Of course, only 2 sectors viz. PSU Banks and metals delivered positive returns in December.

1. PSU banks once again led the way with 7.94% returns for the third month in succession. Most of the PSU banks are already trading at 52-week highs or very close to it. PSU banks have been, surprisingly, beneficiaries of the hawkish rate regime. It has resulted in a combination of improving NIMs, better interest spreads and lower provisioning. Interest yields are growing faster than interest costs and that is changing the fortunes of PSU banks.
2. Metals at 2.43% was the second big positive driver in December 2022; repeating the pattern of November. The decision by China to exit its zero-COVID controls has come as a major boost for metal stocks since a revival in China automatically bodes well for metal demand and metal prices. That is already evident from the LME prices in December.
3. Private banks, FMCG and Oil & gas also did better than the Nifty, despite giving negative returns. In the case of private banks, it was the typical NII and NIM gains of banks spilling over to the private banks too. FMCG was more of a defensive bet in a volatile market. In the case of oil & gas, the gains were more from the upstream oil companies after global crude oil prices in the Brent market bounced in line with China's growth expectations.

Many sectors showed negative traction in December 2022

Out of the 10 sectors analysed, 8 sectors gave negative returns in December 2022 with only 2 sectors giving positive returns. However, there were five sectors that did worse than the Nifty in terms of monthly returns. The worst performer for the month of December 2022 was IT, which fell -5.82% as the global slowdown raised fears of slower tech spending. This could impact the volumes and pricing power of IT companies. 

Two consumer-oriented sectors viz. autos and consumer durables also bore the brunt of the fall in December. Consumer demand is expected to taper as inflation expectations rise and the slew of rate hikes could translate into an overall fall in spending. Among other sectors that underperformed the Nifty, realty ended lower. Pharma returns could have been a lot worse, had it not been for a late recovery in healthcare stocks on rising COVID cases. 

December 2022 was a month of caution and scepticism. Investors were cautious about the spike in hawkishness even as they were sceptical about how the third-quarter results would pan out for Indian companies. Global risks are reducing but the trigger for sustaining Nifty at higher levels still seems to be missing. For that, we may have to wait till January 2023!