Market kya lag raha hain ?”, (How do you see the markets faring?)”. The replies also, more often than not, would probably be non-committal, such as “
Accha hi hain” (It’s all good).
For one, we have seen markets generally doing well over the long term, barring a few smaller periods of sudden volatility. Hence, the chances of your answer going wrong is less. Secondly, we are still a developing economy that is growing, and since growth and equity performance are fast friends hence the “Accha hi hain” phrase is a good enough response, although it is as terse an answer as one can get.
We have had a decent run-up with the NIFTY soaring 1.3x from Covid lows and 50%+ performance since pre-covid highs. Further, valuations are also not cheap and are at a marginal premium to historical averages. So have the indices topped out? The answer to this question needs to be qualified with a time frame. The longer the time frame, the answer would tilt to no, and the shorter the time frame, the answer will be fraught with uncertainty. While we may be at 52-week/all-time highs, history shows countless instances of these being surpassed, and the key ingredient to this is growth.
Investing in equities is investing for growth, and as we continue on this stable and profitable growth path, markets would keep touching new highs. So the real question is about growth, not the indices. Like equity performance, growth also is seldom linear. There are bound to be ups and downs and uncertainties galore at any given instance. For e.g. we see risks on account of high inflation, high-interest rates, geopolitical uncertainties, and supply chain issues, which can dent earnings, albeit in the near term. We don’t expect any of these issues to last till eternity and hence are mindful of shorter-term concerns while making investment decisions related to portfolio alignment and balancing.
Equity performance is a slave to earnings growth, and more often than that they are the key drivers of index/sector/stock performance. In the near- to medium-term, we will be positive on financial and industrial sectors. On financials, we reckon the Indian financial system has cleaned up its act and gone through a period of balance sheet repair and strengthening and are well poised to benefit from credit offtake as well as the financialization of Indian savings. Low NPAs, lower incremental provisioning, and steadier net interest margins (NIMs) augur well for the financial sector in general.
The industrial sector, on the other hand, should see the benefit from the troika of increased capacity utilisation, policy push for domestic manufacturing and relative ease of finance availability (aided by lower leverage of India Inc). We foresee a rising proportion of manufacturing in the GDP mix, which would be a key GDP growth driver in the times to come. We would be concerned about sectors with global exposure and sectors whose earnings drivers are more globally driven — primarily driven by the notion that developed markets as well as large economies such as China may see growth tantrums at least in the near term.
Summing up, given the strong performance and relative outperformance, we cannot rule out a near-term breather for the markets. However, for the longer term, we believe the economy and the markets have enough legs to see healthy growth, and it is “Accha” in the long term.
The author is CIO, PGIM India Mutual Fund
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)