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India’s $3 trillion equity market cap justifies TINA tag for now: SBI Research

While India appears best-placed in terms of growth and inflation outlook, market valuations are back in the ‘rich’ zone and the health of the rural economy remains in doubt.

Mumbai / August 30, 2022 / 06:34 PM IST
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Being an investor in the more than $3 trillion Indian equity market might make one detached from the chaos of the global markets.

While investors in the US, Europe, and China fret over the deep economic pain expected in the coming months, triggered by multi-decade high inflation and a brewing energy crisis, the Indian economy is proving to be more resilient than most believed it was a few months ago.

The K-curve recovery of 2021 from the depths of the pandemic has been shunned to the back pages and the front page is dominated by notions of macroeconomic resilience, resurgent domestic demand, and an inflation dynamic that on the surface appears under the leash.

The benchmark Nifty 50 and BSE Sensex indices posted their biggest one-day gains of about 2.5 percent each on August 30, a day after crashing 1.5 percent in reaction to US Federal Reserve Chief Jerome Powell’s hawkish speech on August 26.

India is the best-performing large emerging market in 2022, enjoying a premium of more than 100 percent to its peers. That premium may be for the level of certainty in growth that the domestic economy provides investors.

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Grown and inflation

“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 the best placed jurisdiction in terms of growth and inflation outlook in FY23,” State Bank of India’s research wing said in a note on August 30.

The Reserve Bank of India believes inflation in the country peaked in April, as evidenced by the moderation in retail price rises in the two following months. Foreign portfolio flows have returned, with net buying worth more than $7 billion in domestic stocks.

Corporate earnings, even after enduring the harshest raw material inflation in recent times, have barely seen any downgrades and fund managers are buoyant that earnings of Nifty 50 companies can grow upwards of 15 percent in FY23.

“Today’s rebound indicates the domestic economy’s resilience in comparison to its global peers,” said Vinod Nair, head of research at Geojit Financial Services.

In times of chaos such as the one currently unfolding in the global economy, India’s relative calm could also prove to be illusionary. For all the bullish momentum that the stock market enjoys, it is unlikely that volatility will leave investors’ side anytime soon.

The Fed and the RBI will still be increasing interest rates when investors ring in the New Year, and global liquidity will continue to contract as the Fed and the European Central Bank shrink their bloated balance sheets.

The west is preparing for a long winter, when energy prices are likely to reach stratospheric levels as the global stock of natural gas dwindles. After falling more than 25 percent earlier this month, global crude oil prices are making a resurgence towards $105 per barrel on hopes that the oil cartel led by Saudi Arabia will pare back supplies.

“India has kept retail automobile fuel prices at well below market-parity levels. However, likely higher global crude oil prices in winter in the northern hemisphere may result in higher domestic fuel prices and inflation both,” Sanjeev Prasad, Anindya Bhowmik and Sunita Baldawa of Kotak Institutional Equities said in a recent note.

Valuations, a major driver of the FPI exodus earlier this year, are back in the ‘rich’ territory, with the one-year forward price-to-earnings ratio of the Nifty 50 nearing 21 times, an 18 percent premium to its long-term average.

Further, the health of the rural economy remains a question mark as a normal but erratic monsoon has seen sowing in crucial crops such as paddy drop sharply on a year-on-year basis, triggering concerns over demand in the festive period.

“We do not like the combination of expensive market valuations and uncertain outlook on energy prices even though the Indian economy and Indian market earnings both appear to be on solid footing,” Prasad of Kotak Equities said.

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 making any investment decisions.
Chiranjivi Chakraborty
first published: Aug 30, 2022 06:34 pm
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