Indian markets have outperformed most of its major global peers since mid-August, thanks to an improving macroeconomic outlook, sustained buying by foreign portfolio investors (FPIs), and easing commodity prices.
Global markets are falling amid expectations of higher rate hikes by the US Federal Reserve. Indian markets, however, have not fallen the way global equities have declined and were quick to recoup losses in subsequent trades.
Since mid-August, Down Jones lost 8.8 percent, S&P 500 fell 9.22 percent, Nasdaq erased 12 percent, FTSE100 declined 3.2 percent, CAC lost 7.4 percent, Dax fell 7.5 percent, Nikkei dropped 4.3 percent, while Hang Seng fell 3.2 percent. The Sensex and the Nifty have meanwhile lost just 1 percent.
The two benchmarks have so far this year climbed 1.8 percent each. While all these major indices lost 1-25 percent.
"Clearly, India seems to be enjoying the TINA (There Is No Alternative) factor, as globally all countries are facing the churn and India seems to be the best-placed jurisdiction in terms of growth and inflation outlook in FY23. We share such optimism as China is also facing a bleak outlook on the back of a construction sector meltdown," an SBI Ecowrap report said.
News reports suggest that China is facing problems like weak demand, uncertainties over China's zero-Covid policy, property woes, and an energy supply crunch. Also, continued lockdowns in China due to Covid forced many factories to shut down. Recent announcement that Apple plans to make the iPhone 14 in India, analysts say it's a big boost to India's manufacturing sector.
According to Kotak Institutional Equities, India’s strong relative outperformance over the past few weeks may reflect investors’ belief in the economy being in a relatively better position vis-à-vis peer economies.
"We hope that the Indian economy and the market can live up to the high expectations implied in expensive valuations of the market. Economic recovery has been somewhat subpar so far and twin deficits are well above comfort levels even without factoring in any potential energy price ‘shock’," a Kotak Institutional Equities report said.
Better-than-expected recent data, such as purchasing managers index and auto sales numbers have shown signs of improvement while analysts expect that retail inflation may ease in the coming months. With the festive season ahead, the demand scenario will improve further.
The recent decline in global oil and commodity prices may have improved India’s near-term macroeconomic outlook. However, the global energy outlook is quite uncertain. Also, buying started by foreign investors have improved sentiments among investors. In August, FIIs bought $6.60 billion in equities.
"We are not sure if the Indian market is factoring in risks from short-term factors such as higher-for-longer inflation unlike other markets. Indian market valuations are quite expensive. Earnings yield is low, relative to bond yield when compared with periods with similar levels of bond yields. Lastly, increasing medium-term risks linked to climate change and geopolitics warrant higher CoE for equities," the Kotak report said.
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