Markets scale record highs. Is this stocks rally different?
Indian benchmark indices Sensex and Nifty hit fresh record highs, but headline indices have seen more modest performance compared to massive rally in mid and small cap stocks
With the monsoon kicking in and the Reserve Bank of India taking a rate pause, the strong momentum in earnings is likely to continue. Thus, at current valuations, the market is expected to continue its up move and remain buoyant
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Indian markets seem to be on an adrenaline rush in June. A pause in key interest rates by the US Federal Reserve undoubtedly injected fresh liquidity in equities but it is also better-than-anticipated macro-economic indicators, which has soothed investors nerves for now.
Money, mostly routed through the institutional route, is being pumped into equities, ballooning stocks into record highs. On Wednesday, the Sensex hit a fresh high of 64,050.44 before ending the day at 63,915.42, while the Nifty, too, scaled 19,000 for the first time ever, hitting a record high of 19,011.25 during the day.
According to Trideep Bhattacharya, CIO-Equities, Edelweiss MF, the Nifty hitting an all-time high reflects the confluence of two factors: The relative earnings resilience of India Inc. based on strong bottom-up drivers in a difficult global macro environment, and the encouraging progress of monsoons across India after a late start.
The monsoon, critical for an agri-dependent economy like India, has been delayed but is gradually picking up pace. According to India Meteorological Department (IMD), Kerala, where the monsoon starts its journey, has received deficient rainfall so far in the year.
The cumulative rainfall until June 24 has been 30 percent below normal compared with 4 percent below normal last year, according to analysis by Motilal Oswal Financial Services. The delay in monsoon can be attributed to cyclone Biparjoy, which has adversely affected the progress of rains. The IMD expects the monsoon to be normal (96 percent of LPA with an error margin of +/-4 percent) in its second long-range forecast for the four-month period from June to September. However, it has also forecast the average June rainfall to be below normal.
“With the monsoon kicking in and the Reserve Bank of India taking a rate pause, the strong momentum in earnings is likely to continue. Thus, at current valuations, the market is expected to continue its up move and remain buoyant,” says Siddhartha Khemka, head of retail research, broking and distribution, Motilal Oswal Financial Services.
Khemka adds that strong institutional flows, healthy macros and a robust earnings growth drove domestic market towards its new highs. “Even the current valuations are reasonable at 19 times one-year forward price-to-earnings (PE) which at previous peak had touched a high of 24 times,” he explains.
Meanwhile, the S&P Global Ratings said it could consider an upgrade in India's sovereign ratings if fiscal metrics improve on a sustained basis and inflation is persistently lower, aided by monetary policy actions, reported Reuters.
The global ratings agency retained India's gross domestic product (GDP) growth forecast at 6 percent, adding that it will be the fastest-growing economy among the Asia-Pacific nations. The GDP growth forecast for the current and the next fiscal has been kept unchanged from the forecast made in March partly on account of domestic resilience.
Buoyed by optimism, Indian markets have risen around 10 percent from the end of March. Both the Sensex and Nifty have grown around 4 percent from the beginning of this year. However, Aditya Khemka, fund manager, InCred Asset Management, feels this is a stock picker’s market where bottom-up research would be essential to creating returns for investors. “We believe there are pockets of deep value and rich valuations in the market. Hence, taking a call on the overall market is difficult,” he says.
However, is this rally different from the past? Khemka thinks it isn’t. “The market is rallying as inflation has begun to taper off and the expectation of interest rates rising steeply is low. Lower inflation expectation would fuel consumption and capex and, hence, we think the rally is similar to those we have seen in the past,” he adds.
Khemka finds value in rural-facing sectors, manufacturing, healthcare, technology and low-ticket discretionary consumption. But he also feels valuations of companies that appear in the headline indices largely appear rich in our framework. “Most of these companies seem to be trading at valuations higher than their historical averages. However, there are many interesting pockets of valuation in the small and midcap space,” he explains.
Among the Nifty-50 constituents, 28 stocks are trading higher from the December 2022 peak. ITC, Tata Motors, Bajaj Auto, Ultratech Cements and Nestlé are the top gainers. However, 22 stocks are lower from the peaks hit in December. These stocks are Adani Enterprises, Infosys, Adani Ports, UPL and Cipla, shows an analysis by Motilal Oswal Financial Services. Smaller stocks in the BSE Midcap and BSE Smallcap also participated in the rally with both the indices jumping nearly 13 percent this year so far.
But there itself may lie a worry. “We do not see any particular reason for the excitement in midcap and smallcap stocks. We note that midcap and smallcap stocks have significantly outperformed their largecap peers in the past two-three months,” says Sanjeev Prasad, MD and co-head, Kotak Institutional Equities.
Analysts at Kotak Institutional Equities call it a ‘struggle to find ideas’ in the consumption, investment and outsourcing sectors after the sharp run-up in several of their favoured sectors and stocks in the past two months.
“The BFSI sector is the only sector that offers value although even insurance stocks have rallied in the past few days,” Prasad adds.
The Indian market has seen a broad rally in the past few months but headline indices have seen more modest performance.
“We are not very clear about the reasons for the rally and the divergent performance. India’s continued weak consumption demand should be negative for smaller companies while the improved macro in the form of lower inflation and CAD should have been more favourable for the performance of large caps based on better top-down view of India among foreign investors,” Prasad elaborates.
Indian markets have lagged most developed markets and several emerging markets quite significantly.