Analysts believe that the raging bulls are poised to reclaim control of Dalal Street after a momentary pause from their record-breaking run to all-time highs. Fuelled by India's robust economic performance in recent quarters, the Sensex and the Nifty witnessed an impressive surge of over 15 percent from their March lows.
According to Deepak Jasani, Head of Retail Research at HDFC Securities, three crucial factors have contributed to the Indian market rally: the approaching pre-election year in 2023, a turnaround of foreign institutional investors (FIIs) into net buyers, and strong earnings reported by companies.
In an interview with Moneycontrol, Jasani said the future trajectory of the markets will be influenced by geopolitical events, global debt-related repercussions, and the potential impact of the El Nino pattern.
Edited excerpt
What factors are propelling the bull run in the Indian markets?
The calendar year 2023 is a pre-election year that will have a significant bearing on sentiments in equity markets. It has been observed that benchmark indices have performed relatively well in the pre-election year.
After being net sellers for the past two years, FIIs have turned net buyers. FII flows have remained positive (on monthly basis) so far in April-July 2023. Sanction crisis in Russia, energy crisis in Europe, China turning a dubious black box after the Covid pandemic, and economic crisis in the US are together making a conducive environment for the FIIs to look at Indian stock markets.
Indian companies have reported strong Q4 results and a good number of Indian listed companies have delivered better-than-expected Q1 results. This is a sign that growth and demand is still intact in the Indian economy. India's structural growth outlook will be driven by a digital infrastructure-empowered lending boom, demographics, domestic demand and improving Foreign Direct Investment (FDI). Support could continue from the government, which is keen to stimulate investment activity in newer sectors. Initiatives like the Production-Linked Incentives (PLI) scheme can help boost manufacturing by wresting some supply chains away from China, propel exports, and attract rapidly-growing industries like semiconductors, electric vehicles, and renewables that are of strategic geopolitical importance.
Many emerging market currencies have strengthened since the beginning of the year due to the recent weakness of the US dollar. Lower inflation, relatively stronger domestic growth, and a pause in the interest rate hiking cycle are also expected to have a positive impact on the emerging currencies including India.
What are the top three major risks to the bull run??
The Nifty is trading at >20xFY24E. Current trailing P/E of Nifty is ~23.5. Pressure on NIM (net interest margin) for most banks, lack of meaningful pricing power among large cement players, higher crude prices impacting inflation, pressure on IT sector revenue growth and demand outlook for FY24 can play spoilsport.
Risk could emerge in terms of higher inflation and more hawkish US Fed’s commentary/action than what the market is expecting. Geopolitical events or global debt related repercussions could impact global risk appetite going forward. If the feared El Nino pattern actually happens and India receives deficient monsoon in the second half of the season, it could have a negative impact on food grain production/inflation/economic growth.
Which sectors do you favour currently and why?
PSU as a sector/theme still has some upside left even as the Bank, Power, Engineering and Commodity space within it are available at good valuations and are showing operational improvement in their respective businesses apart from having a good revenue visibility.
IT index may consolidate some more before embarking on the next upmove. Metal index looks good even as expectation of China demand resurging could keep metal prices firm. Healthcare index looks good for some more upmove as companies benefit out of benign regulatory and competition situation and falling RM costs. Capital Goods index looks good but can be looked at after a small correction.
Which sectors would you advise retail investors to approach with caution?
Auto, Realty and Bank indices could consolidate/correct for some time after a dream run. FMCG index could underperform due to high valuation and subdued growth outlook for the near term.
Performance of IPOs in the first half of 2023
Overall 15 IPOs have got listed in the first 7 months of 2023. Except for 1, all IPOs are trading in the green as of August 1, 2023. Average return given by the IPOs is 44%
Which IPOs have performed the best and which IPOs have performed the worst? IPOs to watch in the second half of 2023
Utkarsh SFB, Ideaforge Tech and Netweb Tech gave the best listing day gains of 82-93%. The worst IPOs include Udayshivakumar Infra (down 10% on listing day), HMA Agro (down 0.04% on listing day) performed the worst.
IPOs to watch out for in H2CY23 include SBFC Finance, Concord Biotech, EbixCash, Signatureglobal India, Tata Technologies, TVS Supply Chain, SPC Life Sciences, Tata Play, FirstMeridian Business, ESDS Software, CMR Green Technologies, Aadhar Housing Finance, Pristine Logistics & Infraprojects Limited
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