The market is trading at the threshold of a new high. Conflicting economic situation led by global slowdown is causing worry that the current rally may not sustain, as it is not reflecting the ground reality. Global unemployment is rising, and consumer spending is moderating due to high inflation. Perplexed, the broad market is up by 15% in less than 3 months, and the Nifty500 index is at an all-time high while the economy is foreseeing a slowdown. The doubt is valid, and the current rally is heavily supported by FII inflow. And any vulnerability to external inflow will have a direct effect on the trend. Well, despite this, we believe that the rally should continue in the short to medium-term due to elevated inflows not only from FIIs but also from domestic investors (DIIs and Retail). We think that the upside of the main index may be limited, but the buoyancy of the broad market will be strong. Stay invested with a focus on the business quality and the historic valuation trend of mid and small caps stocks. Avoid expensive ones and deploy the mantra – value buy.
Buoyant monthly economic data adds impetus
Over the past two to three months, India’s monthly high-frequency economic indicators have presented a positive outlook. Encouraging factors include robust Purchasing Manager’s Index (PMI), Index of Industrial Production (IIP), auto sales, and bank credit data, contributed to an overall sense of optimism. Additionally, the moderation in Wholesale Price Index (WPI) and Consumer Price Index (CPI) figures, along with progress towards the RBI target, largely driven by lower food inflation and a favourable base effect, have particularly uplifted the FMCG and banking sectors. These vibrant indicators indicate a strengthening Indian economy, even amidst global economic slowdown. Most optimism is seen in mid and small-caps, and the Nifty mid-cap index is trading at an all-time high.
Marginal upgrade in earnings
The Q4FY23 results were slightly ahead of expectations. The Nifty 50 index has recorded 15% YoY earnings growth, and the broad market has experienced approximately 10% growth. Strong upgrades are seen for financials and auto, followed by marginal upsides in infrastructure, cement, and capital goods. Conversely, IT, pharma, and metal sectors have experienced some downside. Although the overall figures are favorable, the potential impact on future earnings is dampened by the risk of recession in the US and Europe, indicating a slowdown in external demand and future revenue expansion. Despite the macroeconomic challenges and a marginally projected deceleration of the Indian economy, the market maintains an optimistic outlook for FY24, with a consensus earnings growth forecast of 18% for the Nifty 50 index.
FIIs are investing in the best place
Several concerns have emerged in the global market following the Federal Reserve’s hawkish comment on the possibility of a future interest rate increase, accompanied by a revision of their year-end rate projection. Jobless claims are rising, alerting investors that the investment environment will weaken. However, these worries were short-lived. FII inflows are continuing in anticipation of better performance of the Indian economy compared to the rest. The moderation of international commodity prices is uplifting the mood of domestic economics. It is expected to reduce India’s fiscal deficit and improve corporate margins. There is an optimistic outlook surrounding the India-US meeting, emphasizing long-term strategic development, which is expected to enhance business prospects.
FIIs investment may moderate in the short-term after the solid inflows during the last three months. The observation is that whenever the global economy slows down, it has a lag effect on the domestic market in the short-term. However, this is unlikely to have an impact on a medium to long-term basis.
Though the market is at a new high, the undercurrent euphoria is pale
The broad market mood is not euphoric compared to 19th Oct 2021, 20 months ago, when the index was trading at the same level. We don’t want to state that the level of optimism will revert to the same kind because of the varied current economic stance. Signs of a slowdown are noticeable in private consumption due to a moderation in pent-up demand and an increased disparity between the wealth of affluent and impoverished societies. However, the current level of optimism is not significant enough to indicate a market peak.
Investment strategy to adopt during unpredictable period
The current scenario depicts a global economy that is facing challenges, whereas the Indian economy is showing progress. Over the long term, the domestic strength of the Indian economy is expected to be consistent, although a slowdown can be anticipated in the medium term. In such a precarious situation, the Indian stock market is neither expensive nor cheap. The country’s valuation is just trading above the long-term average, while the main and broad indexes are hovering at their all-time highs.
India’s valuation can slowly expand ahead of the long-term average in the short to medium-term. Following a prolonged consolidation period of 1.5 years, there has been a significant resurgence of interest from both retail and foreign investors. This has provided leeway for the performance of mid and small caps. The latest rally is supported by a robust prediction of domestic economic growth, a normal monsoon (though El Nino risk persists in the latter part of the season), and a drop in international commodity prices.
Consequently, investors should prioritize capital safety, value-oriented investments, and a stock and sector specific approach. The companies that are most likely to benefit from the current market conditions are those that have a stable demand outlook and are more oriented towards the domestic market. Consumption-based businesses such as staples, consumer durables, commercial vehicles, and agriculture are likely to perform well in anticipation of a normal monsoon and a stable long-term outlook. In terms of value buys, the sectors that are lucrative on a long-term valuation are infrastructure, pharmaceuticals, and power. These sectors are trading around their long-term average valuation and hold promising prospects for the future. It is best to hold a balanced portfolio.