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Journalism of Courage
The benchmark Sensex at the Bombay Stock Exchange breached the 66,000 mark on Thursday before closing at 65,558. Over the last three months the Sensex has rallied by 10%, driven by inflows of more than Rs 1.15 lakh crore by foreign portfolio investors beginning May 2023. The rally in the mid- and small-cap indices has been bigger — around 19% and 18% respectively.
There are several factors behind the buoyancy in the markets. India’s strong economic fundamentals amid a weak global growth outlook is a key rallying point for investors. Rise in corporate profitability and a moderation in price-to-earning multiples have also played an important role in making Indian markets more attractive to FPIs. Beginning April 1, 2023, FPIs have invested a net of more than Rs 1.25 lakh crore in Indian equities.
There are other tailwinds too. “One is the broad-basing of service exports driven by the acceptability of remote working and availability of a large number of educated and young people, especially at a time when the working-age population is not growing in other countries,” Prashant Jain, CIO of 3P Investment Managers, said.
“The other”, Jain said, “is that a sharply lower wage inflation relative to other countries (China, Thailand, Vietnam, Cambodia among others) has made manufacturing in India cost-competitive. Also, post Covid-19 and the Ukraine war, MNCs want to de-risk their supply chain on priority.”
These factors are set to enable India to increase its share in global manufacturing. Reports suggest Tesla has started discussions with the government for an investment proposal to set up a factory with an annual capacity of 500,000 electric vehicles. And Apple Inc. is expected to more than double the share of its global iPhone production in India (from around 7% currently).
Stock markets are impacted by immediate news flows and events in the short-term; the medium- to long-term direction is largely in sync with GDP growth and economic fundamentals.
Many believe that Indian markets are generally headed north, and investors should not be swayed by corrections due to global news flows around crude oil, inflation, interest rates, etc.
If the Indian economy has grown at a CAGR of around 6% over the last four decades, there is a sense that India’s share in the global share of services and manufacturing would rise in the coming years. Jain said: “India’s GDP growth could rise from around 6% to 7-8% for the current and next decade… The Nifty 50 index has been rangebound between 15,000 and 19,000 over the past two years. PE multiples have moderated from a peak of 23.2x in September 2021 to 17.7x. These are reasonable PEs and close to India’s long-term average. Risk-reward of equities has improved.”
Retail investors often enter the market and make aggressive purchases when prices have peaked and valuations are already stretched. “We have seen retail investors losing money in stock market bubbles in the past,” an analyst with a brokerage said.
Analysts have cautioned against going overboard with the ongoing market rally. Globally, growth is low and there is a possibility of the US economy slowing in H2 of CY 2023. This can impact India’s exports and thus, growth.
“The ongoing rally has made valuations very rich. Nifty is trading at more than 20 times the estimated FY24 earnings. This is higher than the historical average. Momentum can take the market higher, but at high valuations, risk is high. Some unknown negative developments can trigger a sharp correction. So, even while remaining invested in the market, investors have to be cautious,” V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said.
Domestic institutions have already pulled out Rs 7,357 crore from the markets in July so far. On the other hand, foreign investors have pumped in Rs 11,946 crore of “hot” money. Foreign players exit markets faster than they enter, leaving retail investors in the lurch.
Mutual fund investors should keep things simple. “They should always invest for the long term while opting for equity mutual funds. Timing the market is a big mistake. The only thing which is important is choosing the right fund, maintaining discipline while doing asset allocation, and avoiding short-term volatility,” Mukesh Kochar, National Head-Wealth at AUM Capital, said.
The current enthusiasm in the IPO market is the direct consequence of the rally in the stock market. The impressive 3,000-point rally in the Nifty from the lows of March and the good listing performance of some recent IPOs have again triggered retail investor enthusiasm.
“However, retail investors should exercise restraint in applying for IPOs. There will be a tendency to launch new IPOs at lofty valuations. Retail investors should apply only if the valuations are justified. Offer for sale (OFS) should be approached with great caution,” Vijayakumar said.
Retail investors lost heavily in high-priced IPOs of new age companies in 2020-21. Most of these IPOs are now quoting at huge discounts.
