5 things to know about Indian equity market

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India’s equity markets have performed impressively over the last two months thanks to various factors. India has handled the conundrum of inflation and growth quite well and as a result, while the inflation rate has come down, the economic growth has remained strong. Unlike the developed world, the inflation rate in India never went out of hand and despite global concerns, the good news on the domestic front has kept the Indian market going. As it approaches a new high, it is quite natural for investors to have a bit of concern about the way forward from here.

Earning potential The first thing investors need to do is to look at this new high in light of the earning potential of Indian companies. For instance, although the Nifty index reached its previous peak on October 18, 2021, it has failed to generate any significant returns since then, despite witnessing earnings growth between October 2021 and now. As a result, the valuation has decreased in comparison to what it was in October-2021. The market cap to GDP ratio, which had reached 113%, has now decreased to below the 100% mark. Currently, Nifty is trading at about 18.4 times its one-year forward earnings, which aligns closely with the historical average and is lower than the 23 times observed during the previous all-time high. Therefore, as far as valuations are concerned, the market doesn’t seem to be losing steam on this count. In addition, foreign portfolio flows have seen significant increases, while domestic SIP flows have remained stable.

Portfolio rebalancing What may make the Nifty wobble around a bit at these levels is portfolio balancing and this is the second thing investors should consider especially the conservative ones. Portfolio rebalancing is essential in financial planning, particularly during stock market rallies. It is crucial to monitor whether the allocation to equity has significantly increased, based on market values. A substantial rise in equity allocation indicates an increased level of risk and volatility. Therefore, investors should consider taking some profits out and investing in less volatile investments such as bonds. The interest rate increase cycles are at their fag end and it looks like an opportune time to start increasing allocation to bonds.

Equity exposure The third important parameter investors should consider is their equity portfolio exposure to growth and value factors. Although the benchmark appears reasonably valued, individual stocks and especially growth stocks can be overvalued. This is a good time for investors to take some profits out of the quintessential growth stocks and reallocate to value stocks. Investors should carefully assess the fundamentals of each stock. If certain stocks in the portfolio are trading at excessively high valuations without sufficient support from underlying fundamentals, it may be prudent to consider selling those stocks to secure profits. Comparing stocks with their own historical valuations can also be a good proxy for this exercise if an investor doesn’t have the required skill or time to assess company fundamentals against stock price.

Improved earnings Historically, equity indices have experienced peaks and troughs every 3-4 years, resulting in periods of overvaluation and undervaluation. However, it is important to note that stock prices generally align with their earnings. In other words, the Nifty 50 index’s overall trajectory appears to be strongly correlated with the earnings trend. Therefore, if earnings continue to improve, there is a high probability that the stock market will continue to rise. Nifty EPS is expected to grow at 14% over FY 2023-25 and given that it is fairly valued, return on the index should be in line with EPS growth. Therefore, investors should continue with their SIPs. By maintaining a disciplined approach and staying committed to his/her investment strategy, one can navigate and even benefit from market fluctuations.

Long-term view The fifth and most critical thing is to have a long-term view of the performance of the Indian economy. India is amongst the fastest-growing major economies of the world. It is expected to emerge as the third-largest economy within the next 10 years and therefore it is advisable to not get perturbed by the short-term movements of the Indian stock market. Even though there may be short-term volatility, the remarkable resilience and the growth story of the Indian economy will eventually take the front seat.

The next 10-15 years are most likely to be among the best years for Indian equity investors and one should stay the course to benefit from it.

The author is Chief Executive Officer, TIW Capital. Views are personal