The sharp rally in the midcap stocks has made valuations expensive, and there is room for a correction, said Christopher Wood, global head of equity strategy at Jefferies in his latest Greed & Fear report.
Last week, the Nifty index reached 20,000 for the first time. Even though the major Indian stock market indices are trading at all-time highs, the report stated that the real action this year has been in the mid-cap stocks where gains have been much greater but valuations are also much more extended.
The Nifty MidCap 100 index has risen 29 percent so far this year as against an 11 percent gain in the Nifty index.
The report pointed out that the midcap index, Wood said, now trades at 24.1x 12-month forward earnings compared with 18.7x for the Nifty.
This move, Wood believes has been driven by a renewed pickup in domestic fund flows. Domestic equity mutual funds’ net inflows have risen to ₹29,000 crore in August, the highest level since March 2022, he noted. However, rising crude oil prices are a major caution since India imports nearly 80 percent of its annual crude oil requirement, it said.
"There is clearly room for a correction in the mid-cap area, most particularly as a continuing rise in the oil price has the potential to create some renewed inflationary noise in India, just as it does in the developed world. Still, by historical standards, valuations for the large-cap stocks are not particularly extended. Any pullback in the markets is a buying opportunity," he said.
Foreign investors are not as "overweight" on India as might be thought, given that there is now consensus that India is the long-term structural growth story in Asia, not China, the report further observed.
Capex
On a positive note, Greed & Fear also stated that there is an imminent capex cycle in terms of the rising amount of new private project announcements. Thus, annualised new private project announcements rose by 70 percent year-on-year to a record ₹28 lakh crore in the four quarters that ended June 30. This can also be witnessed in the share price performance of companies geared toward such order flows. The order flow of the capital goods majors (Larsen & Toubro, Siemens, ABB, and Thermax) has risen by an average of 25 percent year-on-year, on a trailing four-quarter basis, for the last six quarters and was up 47 percent year-on-year in 1QFY24 ended June 30. These four stocks have risen by 35–63 percent year-to-date, the note said.
Meanwhile, the annualised gross fixed capital formation to GDP ratio has risen from a cyclical low in FY21 to a 15-quarter high of 29.2 percent in 1QFY24 ended 30 June, it further informed. Also, RBI data also shows that the total number and total costs of projects approved by banks/financial institutions, were up 36 percent and 87 percent YoY respectively in FY23 to 547 projects worth ₹2.7 lakh crore, it added.
"All this means that a deleveraged private sector is poised to take up the baton, to use the relay analogy, in terms of driving an investment cycle after the heavy lifting done by the central government in recent years when most of the fiscal deficit has been driven by the big increase in central government’s capex on infrastructure. This is not a new story but it is now leading to increased efficiencies in the economy," Wood analysed.
G20 India Summit 2023
As per the Greed & Fear report, the G20 Summit was a triumph for the global status of Indian Prime Minister Narendra Modi in the sense that there was an agreement on a statement on Ukraine, which massively dilutes the anti-Russia stance taken by the G7 following the invasion of Ukraine in late February 2022.
"The formal announcement at the G20 of an India-Middle East-Europe Economic Corridor linking India with the Gulf and Europe should be seen as a counterpart to China’s Belt and Road Initiative. That said, Modi and India still have a foot in both camps given India’s membership in BRICS," the note said.
It further noted that India, as a major importer of energy-related products, has different interests from other prominent members or invited members of the BRICS group. It is also of note that following the end of the G20 Summit, there was a one-day summit in Delhi with Saudi Crown Prince Mohammed bin Salman, added Greed & Fear.
"This reflects the dramatically increased economic ties between India and the Gulf countries since Modi’s arrival in power in May 2014. India’s total trade with Gulf countries has risen from $97 billion in FY16 to $185 billion in FY23 ended March 31," stated the report.
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