Indian markets have enjoyed a remarkable rally over the past four and a half years since the pandemic-driven lows of March 2020. The benchmark indices have avoided any prolonged downtrend or significant correction during this period.
A strong earnings growth of 24 percent in Nifty-50 stocks between FY21 and FY24, combined with increasing retail investor participation, both directly in equities and indirectly through SIPs in mutual funds and insurance, has led to a broad-based re-rating of stocks.
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But this time around analysts don't seem to be excited as a host of domestic and foreign concerns are weighing on the Indian markets. "After a nearly 28 percent rise in the Nifty since last Diwali, expectations for the coming year are for moderate returns, accompanied by higher volatility," HDFC Securities said in a recent note on Diwali.
But what's causing the anxiety? Chinese stocks have seen a sharp rebound following recent fiscal and monetary stimulus measures, diverting some investment flows away from India. Furthermore, geopolitical tensions in the Middle East and US Presidential Elections possibly dictating the economic outlook are all weighing on market sentiment. As for domestic triggers, a key concern lingers around how earnings growth will pan out this year.
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"We are cautiously optimistic at the moment due to various domestic and foreign factors and rich valuations. While strong flows from local investors are safeguarding the market, FIIs selling is a negative for the market," Kranthi Bathini, Director of Equity Strategy at WealthMills Securities, said in a conversation with Moneycontrol. He also added that investors are increasingly becoming cautious because of high valuations.
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Bathini said that a potential earnings disappointment could be the next trigger for a market correction in the coming weeks, as Indian companies begin reporting their July-September 2024 (Q2-FY25) results. To be sure, Bajaj Auto's recent caution on sluggish two-wheeler sales during the festive season has already sparked concerns.
Analysts warn that the mid-and small-cap segments, which have rallied significantly over the past 12 to 18 months, could face sharper declines if earnings fail to meet expectations. In this uncertain phase, market movement is expected to be stock-specific, rewarding companies that deliver strong results.
After a strong performance in Samvat 2080, where the midcap and smallcap indices surged 46 percent and 43 percent respectively on the NSE, analysts believe the rally in these segments may take a breather in Samvat 2081. V K Vijayakumar of Geojit Financial Services says that the current trend of largecaps outperforming mid and smallcaps is expected to continue. He cautions against rushing to buy beaten-down mid and small-caps, as a large number of stocks could be under pressure because of rich valuations and high possibility of earnings disappointments.
For investors, the advice is to tread carefully. Large caps, with their relative stability and attractive valuations, are seen as a safer bet right now. Experts recommend a wait-and-watch approach, focusing on companies with clear earnings visibility for the coming quarters and only investing in those that meet or exceed expectations. "Last Diwali was forgiving investors even if they had poor quality stocks in their portfolio, this time due to sentiment turning quite negative, there's little room for error, " Bathini added.
Which sectors are looking attractive?
Financials: After a relative underperformance over the past year, the banking and financial sector stocks have attractive valuations at display. Meanwhile, the Q2 has been largely impressive with Axis Bank being a case in point. Following a stellar rise, a host of brokerages including Nomura and Goldman Sachas have dished out bullish calls on the counter. A key reason is that banks have been underperformers and have missed the rally over the past two years, despite strong profitability and historically healthy balance sheets. Experts suggest that RBI’s rate cut would help lenders to improve their margins. Bathini suggests HDFC Bank, ICICI Bank, and Axis Bank as his top picks.
IT: With the outcome of the US Presidential Elections on the horizon, investors will likely get a clearer picture of the outlook. However, valuations are still attractive and a buy-on-dip strategy works best for the sector. Furthermore, a further cut by the Federal Reserve will also bode well for IT companies. The Nifty IT Index, rallying over 26 percent in the past six months, has fared better due to Q2 results, which were marginally better than Q1 and due to a slight upgrade in margin outlook. Management continues to project a positive view due to increasing AI-based deals and improvement in the BFSI segment, especially in the US. AI is expected to be a driver in the long term. TCS, Wipro and Infosys could lead gains this Diwali.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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