Indian indices fell on Wednesday following a sell-off in global peers after US inflation unexpectedly rose in August giving the Federal Reserve ammunition to deliver a third 75 basis points interest rate hike next Wednesday.
Most global peers declined after a broad sell-off sent US stocks reeling in overnight deals. All three major US stock indices veered sharply lower, snapping four-day winning streaks and notching their biggest one-day percentage drops since June 2020 in throes of the Covid-19 pandemic. The Dow Jones Industrial Average fell 1,276.37 points, or 3.94 percent, to 31,104.97, the S&P 500 lost 177.72 points, or 4.32 percent, to 3,932.69 and the Nasdaq Composite dropped 632.84 points, or 5.16 percent, to 11,633.57.
Asian markets also tumbled following the crash on Wall Street. MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.3 percent in Asia trade on Wednesday. Resources-heavy Australia plunged 2.8 percent, while Japan's Nikkei tumbled 2.7 percent.
However, India remained one of the best-performing markets. Indian markets fell around 2 percent in early deals but later trimmed losses to end around 0.4 percent lower.
Most experts see today's fall as a minor dip in India's success story and an opportunity to accumulate more stocks at inexpensive valuations. Going ahead analysts expect the upward momentum in Indian markets to continue. Post the rise in US inflation in August, the policy decisions made by the RBI and Fed at their upcoming policy meetings will drive the market going ahead, they said.
Why is India outperforming peers?
Analysing the market trends, Sujan Hajra - Chief Economist and Executive Director, Anand Rathi Shares and Stock Brokers said that beyond the very short term, the equity market is driven mainly by three factors – fundamentals, liquidity flow towards the equity market and equity valuations.
"Despite the modest deterioration in the recent past, most of the high-frequency indicator suggests that India’s macro fundamentals are stronger than the peers. The Indian corporate sector is doing better than the overall economy with continued strong earnings growth. Despite some margin pressures due to high raw material, fuel and wage costs, the average corporate margin in the recent past has been better than what prevailed before the pandemic. Domestic liquidity flow towards the equity market especially through mutual funds remained strong," Hajra pointed out.
Meanwhile, Suni Damania, Chief Investment Officer at MarketsMojo noted that Nifty recently touched 18,000 because the undercurrent in the market is robust.
"India, for the first time, witnessed 10 crore Demat accounts, and we are also seeing how FIIs have come back strongly. Even the volume in the market has improved significantly. India Inc's earnings and their commentary continue to make us believe that India is on a growth path. At the same time, the report from Moody's also suggests that global events will not impact India's growth story," he explained.
Is a new high in sights?
According to Hajra, the withdrawal of investment by foreign portfolio investors (FPIs) from the Indian equity market during the last one year has been the main reason why the Indian bellwether indices did not scale new highs since the middle of October 2021. From late July 2022, however, FPI flows have also turned positive now, he stated.
"The valuation parameters such as the price to earnings ratio currently remain well below the average since 2016. The combination of all these factors makes the Indian equity market attractive, which, in turn, is driving the Indian market up since late July 2022. The market reached a new life high, therefore, remains a distinct possibility," Hajra predicted.
Damania also agrees. He highlighted that India is in a very sweet spot where growth would be high and inflation low. These two combined are rare to find in a volatile world economy and no fund manager can afford to ignore this, he added. "Therefore, we believe that 18k is just a number and that Indian indices will continue to rise even further," Damania said.
However, there are numerous risk factors, especially on the global front which are likely to keep the Indian equity market volatile in the foreseeable future, cautioned Hajra.
Naveen Kulkarni, Chief Investment Officer, Axis Securities PMS also warned that the current market buoyancy globally, including in India, is based on the expectation that inflation has peaked along with softening crude prices.
"We believe that, to an extent, the expectation of inflation peaking is right, but one will have to keep an eye on energy prices in Europe & US with the onset of winter, which can re-ignite the inflation fire," he said.
