EspressoLogy

Bulls have seized control of Dalal Street, even as the global headwinds and lofty valuation continue to warrant caution. The benchmark indices - Nifty & Sensex - scaled to their new life high. The wait this time around was quite long at around 13 months, but was worth its dime. Sensex breached 63,000 levels while Nifty rose above 18,800.

The current situation

Markets continued to chase gains in November as the Sensex rose 3.87% and the Nifty added 4.14% during the month. The sentiment has turned bullish towards Indian markets in recent months amid improved corporate earnings, strong macroeconomic performance as compared to a weak global scenario and a revival in foreign funds inflows. The FIIs bought more than Rs 22,000 crore of Indian equities in November.

Hopes of global central banks, especially the US Federal Reserve, slowing down the pace of interest rate hikes, along with the expectations of Reserve Bank of India’s (RBI) repo rates reaching their peak soon, have bolstered further gains in the financial market.

Momentum in domestic markets further gathered steam with the improving macro outlook amid feeble global sentiment. India’s economy is expected to grow at a slower rate of around 6% - 6.5% for a few years, but this would not be a bad thing as Asia’s third-largest economy is at a sweet spot compared to the rest of the emerging economies. Slower growth would help cool down inflation and narrow the government’s twin deficits over the years.

Where we’re headed

As per the latest data, India’s GDP registered a growth of 6.3% for the September quarter, in line with the broader expectations. Private consumption expenditure primarily continues to drive economic growth, which indicates an ongoing robust recovery. Going ahead, the growth recovery is likely to be stronger amid expectations of rising private CAPEX in the second half of the year.

Meanwhile, corporate earnings for the quarter ending September 2022 have been mostly in line with expectations. The profitability of India Inc. declined due to high inflation, rising interest costs and high expenditure. However, India Inc’s topline growth in Q2FY23 was around 24% YoY.

Concerns have risen about the expensive valuation of Indian equity markets. Nifty is trading at a trailing twelve-month (TTM) P/E of more than 22x. This is higher than the 10-year average P/E. However, if we compare this to the valuation when the Nifty reached a high last year, it tells us a different story.

Nifty’s P/E on October 18, 2021, when it tested high, was 28.17x, while its P/E on November 30, 2022, when it touched an all-time high again, was 22.54x. This shows the valuation now is relatively cheaper. Stock prices of Nifty stocks have risen significantly in the last year, and so have their earnings, as can be seen in the P/E number.

The rich valuations and strong performance of stocks as compared to global peers may suggest investors’ optimism towards India for the medium-term outlook. But given the challenges, the upside seems limited.

The bigger picture

The overall scenario remains tentative as far as providing support to markets is concerned, but certain optimistic voices may help pep up investor sentiments. The latest one to join was India’s chief economic adviser V Anantha Nageswaran, who expects the GDP growth to sustain between 6.8% - 7% for the full fiscal year. This will definitely help set the market mood, but one has to accept the fact that global recessionary pressure may eventually cast its spell on India as well. All in all, economic growth may maintain an upward trajectory movement, but the pace of growth may get moderated by the global contagion. Meantime, there are a lot of things to ponder over.

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