With the market at an all time high, many are wondering if the current rally is likely to continue further. Market watchers cannot be faulted for being circumspect – many stocks are at an all time high and valuations look steep in many sectors. However, looking at prices without correlating with economic/market drivers is leading skeptics to wrong conclusions. Though no one can predict Mr. Market with certainty, indicators suggest that the market rally will continue further.
Comeback of growth
- In the post COVID recovery, with the economy (and society) normalising, we are seeing a comeback of earnings. Latest quarterly earnings, channel checks, retail sales and order books testify that demand is picking up. Cost optimisation plans put in place by businesses during the COVID period are giving a boost to earnings. In fact, analysts might be underestimating the growth for FY23 as post COVID recovery is surprising the street every month now!
- Credit demand is looking positive – we have come out of the credit cycle trough. Bank NPAs are lower than expectations. Continuation of expansionary monetary policy in the near future will support this upswing.
- The Digital/Internet segment will see newer listings of scalable businesses and existing listed companies are displaying robust growth.
- Global majors have taken a lesson from the COVID disruption to not keep all their eggs in the Chinese manufacturing basket. India will be among the beneficiaries of this “China plus one” strategy. A positive policy environment will support this (see below).
- PLI scheme announced by the government is providing a much needed fillip to manufacturing in key sectors. Manufacturing may bounce back stronger and sooner than expected as the PLI scheme envisages time bound and scale based incentives.
- With emphasis on infrastructure development in the recent budget, we will see a resurrection in infrastructure, capital goods and allied sectors.
Conducive macro environment
- Despite some recent anxiety (uptick in bond yields), the overall global macro environment is and will remain expansionary (US 10 year is currently at 1.45%). Analysts do not expect the US Fed to raise interest rates any time soon.
- “Inflation is not a bad word”. Inflation, within limits, when associated with growth is to be expected (and dare I say welcome).
- In terms of valuation, India is placed better than most other relevant markets. Using Warren Buffet’s indicator of market cap to GDP, India is between 90% and 100%; for comparison, the same index for the US is close to 200%. If we look at valuation metrics such as P/E, the Indian market is at its long term average in terms of relative valuations vs S&P 500 and MSCI EM. Do remember, that valuation has to be seen in light of growth potential.
- We continue to see record FII inflows into India. Many investment houses have called out India as the preferred destination among emerging markets.
Despite all these drivers mentioned above, the markets are likely to remain bumpy and will have periods of correction – it’s never smooth, isn’t it!
Sound analysis and robust risk management will enable investors to choose the right industries and equity names to make the most of this growth opportunity.
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