Receding fear of rate hikes, positive global cues create optimism zone for Indian equities

The Q4FY23 earnings base for the NSE 200 index has expanded by around 21 percent on-year.

The Indian equity market seems comfortably seated in an optimism zone, sending stock prices to zoom, thanks to an ebbing fear of rate hikes in a recessionary environment, positive growth cues from around the world, and a lower valuation premium for emerging markets.

In a report, ICICI Securities has stated that the issue created by the banking crisis in the US, which had triggered the apprehension of an imminent recession and impending slowdown in Indian economic recovery, is now being addressed and resolved, as seen from the sharp rally in Indian stocks since the lows of March 2023.

The market correction of March was triggered by collapse in US banks, resulting in the NIFTY50 P/E valuation premium over the MSCI EM index reverting closer to its long-term median of around 45 percent. However, to everyone's surprise, this did not impact the domestic demand-driven economic activities, which stayed positive so far, as is reflected by robust high-frequency indicators such as GST and PMI for April 2023, ICICI Securities said in the report.

The Q4FY23 earnings base for the NSE 200 index (excluding commodities) has expanded by around 21 percent on-year, with results largely in line with expectations. The NSE200 index has shown an on-year growth of approximately 9 percent for the fourth quarter as of now, with a growth rate of 21 percent, driven primarily by financials, autos and technology. Metals and cement sectors, however, acted as major drags on earnings.

"Based on this, our one-year ahead target for the NIFTY50 is 20,000, indicating a potential upside of 10-11 percent from current levels. We continue to hold an 'overweight' position on capital-intensive and cyclical sectors that exhibit the characteristics of the value factor," ICICI Securities said.

ICICI Direct has noted that the Quantitative Tightening (QT) cycle in the US has now entered its final phase, following the latest interest rate hike of 25 bps, which means that there may not be any additional pressure on emerging market (EM) equity valuations.

However, on the flip side, the decelerating growth of developed economies is expected to impact exports, as seen from the subdued growth in merchandise exports in recent months and the growth guidance provided by IT services firms, according to the brokerage house.