Frontline indices the Sensex and the Nifty ended higher for the third consecutive session on April 3 as the risk appetite of investors improved on hopes that a pause in rate hikes may be near.
Last week, the Sensex rose nearly 2 percent, breaking the losing streak of the last four consecutive weeks while the Nifty rose over 2 percent after three consecutive weeks of losses.
Last month, the Sensex and the Nifty ended flat despite lingering concerns over inflation, rate hikes and fresh worries such as the banking crisis in the US and Europe. However, mid and smallcaps declined.
Market discounts events that lie ahead. At present, it appears to be discounting a pause in rate hikes, economic growth and healthy corporate earnings.
Recovery on cards
The recovery in the market may continue provided there is no negative surprise on the macroeconomic front.
G. Chokkalingam, Founder & Head of Research at Equinomics Research & Advisory Private Limited, expects the domestic market recovery to continue.
"Faster growth of the Indian economy in FY2024 as compared to the developed world should finally attract FII inflows in FY2024. Soon FY25 earning estimates should be considered while valuing the domestic equity markets which would make the valuation of Indian markets quite attractive. Over ₹30 lakh crore erosion in the overall market cap and about 7 percent fall in the Sensex from its record high would also make Indian markets quite attractive," said Chokkalingam.
"Robust tax collections, capex plans, aggressive PLI schemes, record low NPAs of the banking industry, good agri crop output, robust NRI remittances, moderation in inflation rates, etc., along with cheap oil augur well for the domestic markets to recover significantly in the short-term," he added.
The domestic market has valuation comfort which will support it in the short term.
Alok Agarwal, Portfolio Manager, Alchemy Capital, highlighted that valuations of the domestic market have corrected and are now closer to longer-term averages.
"Nifty is trading at 17.3 times – one year forward earnings, this is the same as the last 10-years’ median valuation, nearly 24 percent below historic highs touched in October 2021. Froth in valuations getting out of the way is a major tailwind for Indian markets," said Agarwal.
"It is interesting to note that, this is only the fifth occasion in history, where Nifty's one-year forward PE (price-to-earnings) has corrected over 24 percent from its peak. The previous four were in 2006, 2008, 2011, and 2020. History suggests that accumulating during such times has been rewarded by markets," Agarwal added.
But headwinds persist
Despite all positivity, the market still has to deal with a lot of headwinds.
"The important question now is whether this rally can be sustained. There are more headwinds for markets at this stage," said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
Vijayakumar underscored that the strongest headwind is the sharp 5 percent spike in Brent crude caused by the unexpected output cut by OPEC+. This will make inflation management tough for the RBI and therefore a 25 bps rate hike by the MPC on April 6 is a given now.
The risk of inflation and rate hikes is not gone. The global economy still has a looming risk of a growth slowdown.
"A hard landing in the US could lead to a higher risk of contagion of recession and a longer impact of a slowdown in India. High interest rate hikes by the RBI to control CPI in India, despite some aspects of CPI especially core inflation being structural, could adversely impact growth," said brokerage firm Kotak Securities.
Harsha Upadhyaya, President and Chief Investment Officer – Equity at Kotak Mahindra Asset Management Company, believes the global economy and markets continue to be in a fragile state.
"With inflation still being higher than interest rates in most economies, rate actions are likely to be continued by most central banks to reign in inflation. The geopolitical situation continues to be similar to the previous year’s. In all, we expect even the domestic equity market to be volatile at least in the immediate term, although our economy continues to be more resilient as compared to the global ones," said Upadhyaya.
What should investors do?
Retail investors should avoid taking aggressive bets in the short term and accumulate quality stocks at cheaper valuations for the long term.
"Amidst the risk of global slowdown, its lagged impact on India, falling input costs – the opportunity for margin expansion, healthier CAD/GDP, we prefer companies with diversified revenue mix and strong cash flows," said Kotak Securities.
Among the sectors, one can bet on auto, manufacturing and banks as their growth outlook is bright due to healthy prospects of economic recovery.
"We are positive on banks, autos and manufacturing. In our view, the banking sector’s balance sheet is amongst the strongest it has been in the last 10 years, especially in terms of credit cost potential," said Agarwal.
“Auto sector's volumes are improving across segments after a lull of a few years. Over the last few years, the sector had suffered from Covid, rising raw material prices, rising crude oil prices, higher insurance costs, and semiconductor chip shortages. Most of these issues have been settling down. As a result, the sector can likely see improvement in volumes, realisations, and margins.”
"In the manufacturing sector, while public capex led by the government is already on, the private capex is expected to pick up soon," added Agarwal.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.
