Disregarding concerns around India being the “most expensive market in the world” and the spike in crude prices (currently trading around $90/ barrel), the benchmark Nifty at the NSE breached the 20,000 mark for the first time on Monday. The Sensex at the BSE closed 0.79% higher at 67,127.08 — above the 67,000 mark for the first time.
Should long-term investors worry about expensive valuations — or should they continue to increase exposure to equities in a disciplined manner?
There is general enthusiasm around high expected growth in the Indian economy over the next decade, and there have been constant foreign inflows into Indian equities. Since the beginning of this financial year, foreign portfolio investors (FPIs) have invested a net of Rs 110,579 crore in equities, pushing the Sensex up by 13.8%.
GDP growth numbers released in August showed that despite subdued global demand, the economy expanded by 7.8 per cent in the quarter ended June 2023. The growth was supported by domestic consumption and investment activities, along with strong revival in the services sector, which makes up more than 50 per cent of total economic output. Domestic investments too indicated strength, and gross capital formation stood at 7 per cent.
A Balasubramanian, MD & CEO, Aditya Birla Sun Life AMC, said: “Confidence in sustaining economic growth for the next 10 to 15 years is high. Therefore, the conviction of staying invested is also gradually rising. I think there is an orderly movement in the market. We are moving from cyclic nature to a structurally sound platform.”
What are the concerns?
External demand is expected to remain a drag on growth as western economies go through a protracted slowdown. Fitch has downgraded the US sovereign rating from AAA to AA+, citing expected fiscal deterioration over the next three years, a high and growing general government debt burden, and steady deterioration in governance over the last 20 years.
Agriculture growth in India has slowed, reflecting delayed sowing due to deficient rainfall in June. A deficient monsoon poses the biggest risk to domestic demand. Food inflation is expected to remain high, putting pressure on the Reserve Bank of India to tighten rates. Also, the lagged impact of the 250-basis point rate hike since April 2022 will weigh on demand.
However, robust Indian government capital expenditure is expected to cushion growth to some extent.
What is critical for the economy and markets going forward?
Investment growth (measured by gross fixed capital formation, GFCF) remained strong (8% growth year-on-year), benefitting from the front-loading of government capital expenditure ahead of elections. Central government capex grew 59% in Q1 FY24. There was an almost 76% growth in capex by the top 19 states.
For the momentum in investment demand to continue, a sustained pick-up in private investment becomes critical. Improving capacity utilisation levels in the manufacturing sector, and healthy balance sheets of corporates and banks are enabling factors for this, according to a Care Ratings report.
Other critical factors for the economy and markets are good monsoon rains, stable crude oil prices, and a pick-up in consumption and investments.
For India to grow at 7-8% over the next decade, manufacturing has to be a key contributor. Many feel that with more and more companies looking to avail benefits of the Production Linked Incentive (PLI) scheme, manufacturing will get a boost.
What should investors do at this stage?
While there are concerns that Indian markets are expensive compared to others, it is expected that India would be one of the highest growth economies; this has been iterated by both the IMF and World Bank. While concerns around inflation remain, experts feel that a softening in inflation and decline in interest rates would push both consumption and investment-led growth.
“In a growth country, what should be given priority, growth or valuation? Most well-established global fund managers have always paid attention to the overall growth momentum that could come in the long run. If that is sustainable, then valuation is actually a secondary consideration,” Balasubramanian said.
He also said that as equity as an asset class will remain a good for 10-15-year investments, investors should not worry too much about valuation, and focus on asset allocation.
Long-term investors should focus on investing through systematic investment plans (SIPs) rather than lumpsum investments in the current market, as it is trading at all-time highs.
Investors must be cautious about mid and small caps. As the Sensex rose by 13.8 per cent since April 1, the mid and small cap indices have risen by 37.4 per cent and 43 per cent respectively. Experts say that investors should be careful about investing in that space — and should instead go with mutual fund schemes that invest in large cap or blue chip companies, or multi asset allocation funds.
“The market is showing red signals on micro caps and mini caps, where prices are much ahead of fundamentals. There is a green signal for large and mid caps stocks based on valuations. It makes sense to cross signals when it is green. A large or a multi asset allocation fund will be more appropriate for investors from a risk return point of view,” Nilesh Shah, MD, Kotak Mahindra AMC, said.
“We are witnessing the Triveni sangam of flows, sentiment, and fundamentals at this time. However, at current valuations, we have to deliver on growth and also keep governance standards better than the peer group,” Shah said.
The Sensex at the BSE closed 0.79% higher at 67,127.08 — above the 67,000 mark for the first time. 
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