Indian markets can soon reclaim their previous high and edge even higher over the medium term, said Sneha Poddar, AVP Research, Broking & Distribution, Motilal Oswal Financial Services. In an interview with MintGenie, Poddar said that investors should either look at sectors that have a strong structural long-term story but are currently facing short-term headwinds or sectors which are coming out of the woods after facing a slowdown. Edited Excerpts:
Now that Nifty has crossed 18k, do you see new highs in sight soon, say by 2022-end?
Nifty has managed to cross the 18k mark once again, the level last seen 5 months back. It has rallied ~19% from June lows and has turned positive for CY22 YTD, clearly outperforming its global peers. In fact, it is now just 3% away from its all-time high and was one of the top-performing markets globally in Aug’22. The steady performance of the Indian economy amid global uncertainties is helping the domestic market outperform. It can soon reclaim its previous high and edge even higher over the medium-term given the return of FII inflows, the upcoming festive season which can spur demand and capex theme picking up.
What factors could help achieve new highs for the markets?
India has multiple factors working in its favour. Strong macro data, FII turning positive, steady earnings and above average monsoon have been some of the key factors driving the outperformance in the domestic market. As oil and several other commodity prices have sharply corrected recently, inflation seems to be peaking out for India. Though it still stands high at 7%, there is a marked difference between India's and other countries inflation, as many countries are still struggling with multi-year high inflation. On the GDP front, India continues to be one of the fastest growing emerging economy with IMF forecasting ~7.4% GDP growth for FY23. In Q1 our GDP grew robustly at 13.5% led by strong growth in consumption. Other macro data points like IIP and GST collection too continue to be encouraging. Even the corporate earnings have been healthy despite global challenges, reflecting the strength of the Indian economy.
Earnings of Nifty50 companies grew strongly by 36% in FY22 and the momentum is expected to continue with expected growth of 16% CAGR over FY22-24E. With festive and marriage season around the corner, the consumption demand is expected to be profound. Above average monsoon would further result in the revival of rural demand which would provide a leg up to the overall consumption. Additionally, the government has stepped up its capex cycle and laid a lot of emphasis on PLI schemes and Atmanirbhar Bharat which is spurring the revival of private capex. This in turn is resulting in strong credit growth which touched a 9-year high recently at 15.5%. Thus a combination of consumption, capex and credit growth could help India keep its economic growth strong which could aid domestic equities to achieve a new high over the medium term.
Why do you think this surge is happening since the macro environment is still very tough? Quantitative tightening, inflation is back. Historically, in a tightening liquidity environment, don't markets fall, and FIIs move away? Why is this time different?
As I mentioned above, India is in a sweet spot as compared to the global economy. In fact, the crisis being faced by Europe and China is presenting an export opportunity for India. This has made, FIIs again turn enthusiastic about the Indian Markets and since the end of July’22, they have already bought more than Rs60k crore (including primary markets). The month of August saw the highest inflow since Dec’20. Amid the tough global macro environment, where the US Fed has signaled to continue with their aggressive rate hike plans in order to curb multi-year high inflation, the Indian economy is showing resilience while other economies are limping. It is benefitting from the strong domestic consumption, capex revival and huge export potential emerging from the gas crisis in Europe and the China+1 strategy being adopted worldwide. Moreover, the economic health of India is much more comfortable and healthy as mentioned above as compared to other global economies.
Amid the recent rally, what is the new resistance level for the Nifty?
Though the Indian market is showing quite a resilience amid fragile economic health globally, the Nifty might face some resistance near its all-time high level of 18600. There is a strong fear of recession in two large economies viz. Europe and US and the aggressive rate hikes by the Central Banks over there can derail the overall global economy. India too could see some spillover effect on its economy though the impact would be limited given India being a largely consumption-driven economy. Even valuations at those levels would be slightly above the comfort zone as P/E of 22xFY23 EPS would be 12% premium to its 10-year average P/E and thus would require strong earnings delivery in order to get re-rated. Technically too the resistance is placed near that level and would require a positive trigger to take the Nifty even further higher.
Going ahead, do you believe the rally will continue, or will the markets consolidate and trade in a range? What will this new range be?
The positive momentum in the market is likely to continue over the medium term with strong participation of retail and domestic flows which is now further supported by FIIs who have turned positive. We believe the FII buying to continue given the huge offloading already done by them and now India being a more favorable position as compared to other economies. With the aggressive rate hike concern already factored in by the market, the Indian market is looking ahead where the corporate earnings are expected to continue their healthy delivery given the robust consumption, capex revival and multi-year high credit growth. Even the operational profitability is expected to turn around with softening of commodity prices. Thus Nifty might reclaim its all-time high of 18600 and even edge a little higher. However, given the prevailing global uncertainties and the sharp rally witnessed recently in domestic equities, the upside could get capped in the near term and the market may consolidate in a broad range with intermittent bouts of volatility.
What should be the strategy for a newbie investor amid this rally?
The new investors instead of looking at the index should focus on sectors and stock selection among them. They should identify the growing sectors and good quality stocks within them which hold good potential. Unless the valuation is exorbitantly too high, one should ignore it and focus on the growth prospects of the company and whether it can deliver it on a sustainable basis. One can start adding the stock to the portfolio and later can build a bigger position in it if he gets the opportunity at lower levels. Otherwise one may miss good investment opportunities during a market rally.
Do you think expensive valuation is a concern for investors now?
Nifty now trades at 21x/18x FY23E/FY24E EPS, which is marginally above its long-term average P/E. Thus the valuation seems pretty fair which might limit the upside from here. Having said that, how the festive season pans out and the management commentaries post Q2 earnings would drive the next phase of movement in the market. We might see the market consolidate in a broad range till the earnings growth trajectory changes substantially. However, if we look at the broader market, there are still many pockets where the valuations are comfortable and thus provide investment opportunities to the investors.
Should investors look at contra bets with Nifty at 18k?
Given the sharp rally in the market, investors in order to generate alpha over a long period should look at contra bets otherwise chances are high of getting stuck in momentum stocks. One can either look at sectors that have a strong structural long-term story but are currently facing short-term headwinds like IT, Pharma, and Insurance. Or sectors that are coming out of the woods after facing a slowdown like Auto, Chemicals, Capital Goods, Retail, Banking, and Real Estate. One can also look at some of the underperforming stocks within the preferred sectors, whose fundamentals are good and can outperform once the headwinds abate.
Are you bullish on the IT sector or should investors buy more of sectors like financials that are outperforming?
Indian IT firms are facing the headwinds of wage hikes and continued supply-side pressure while the global economic slowdown may pose some moderation in their near-term growth. But these are short-term pain that might be there for the next 2-3 quarters. From a long-term perspective, we remain positive on the IT sector due to a structurally favourable demand outlook, on the back of Digital and Cloud transformation deals. The valuations post sharp correction has turned attractive, thus one can accumulate quality names in a staggered manner for long-term investment. We continue to like financial companies too, given that credit growth is at the cusp of the upcycle while the rising interest rate scenario is favourable for them.