Indian Equities

When it comes to Indian equity markets, our eyes focus on two benchmark indices.  With Nifty 50 Index around 15,700 and BSE Sensex around 52,000, there was another milestone, which we hit – that is linked to market capitalization.

Indian equity market capitalization crossed the $3 trillion mark – making us the 8th largest equity market in the world.  We are just behind Canada now, which stands at $3.1 trillion.  Needless to say, that the US is the largest equity market in the world -with a whopping market capitalization of $48 trillion.  The second largest market, China is close to $11 trillion – the differential of almost 75%!!!

Coming back to India – does it sound it too fast, too soon?  Will the party be over soon?

The recent FOMC (Federal Open Market Committee) meeting indicated that there is a growing consensus on going for rate hikes by the end of 2023 as compared to 2024 as expected earlier!  Why an earlier rate hike?  Because the economic recovery in the US post the outbreak of pandemic in 2020 is better than expected.  Interest rates were lowered to infuse the growth – if that objective achieved, we do not need lower interest rates!  Because, lower interest rates result in inflation and we have started seeing signs of a rising inflationary trend. 

But should we start worrying from right now?  Interest rate hikes are still more than two years away.  Moreover, US Fed chair warned against reading too much into the news!  They continue to buy bonds.

Why should we stay optimist?

  1. Vaccination: Beginning of the end of pandemic.  The global program has gained decent momentum.  Currently, there are around eight vaccines available.  India too has approved third vaccine, Sputnik.  Zydus Cadila is also likely to get emergency use approval for ZyCov.  Vaccination drives have picked in India as well!
  2. Equity markets are a slave of earnings growth.  Businesses have now learnt to deal with lockdowns. Lockdown forced firms to think about cost control and improving operational efficiencies.  Macro environment here is also quite supportive.  Low interest rates and fiscal policies support the manufacturing sector.  India’s top export partners such as the US, UAE and China & Hong Kong are showing a declining trend of new cases which helps our export-oriented firms.  FYI – 40% of the NIFTY 50’s overall earnings are export based! Monsoon is also expected to be good.

Valuation are not cheap but also not expensive yet.  The Nifty’s valuations at ~22x / 18x FY2022E/FY2023E EPS are at slight premium to the long-term average multiple but are not in the expensive zone yet. There will be some price and time correction, but there would be ample stock-specific opportunities for investors.

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