Market up move – Why it happened and what will happen

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Samvat 2077 brought cheer to the stock markets – not just in India, but globally, too. Government growth stimulus efforts and easy monetary policies adopted by central banks in terms of low interest rates provided ample liquidity and triggered an economic revival. This helped to drive the markets.

Now, as talk of tapering and tighter monetary policies (with central banks starting to unwind their balance sheet expansion) starts gaining ground, we asked experts about what propelled the markets to their current high levels and what growth drivers will be for the coming year.

Why the rally?

“Abundant liquidity, alongside lower interest rates, were the enablers for the market optimism,” said Aishvarya Dadheech, fund manager at Ambit Asset Management. “We also witnessed increased retail participation in the market, which supported the broader market in a big way.”

Foreign institutional investors (FIIs) invested heavily over the past one year, with India seen to be better positioned in terms of growth and recovery among developing markets, he said.

“Samvat 2077 returns were broad-based primarily on account of better participation witnessed across stock categories as well as sectors that were relatively narrow in the pre-pandemic years,” said Neeraj Chadawar, head – quantitative equity research at Axis Securities.

He said the pandemic year translated into superior profitability for Indian companies, which is manifested in the 15 percent growth of the Nifty EPS in FY21, led by cost rationalisation practices and pent-up demand.

“Timely initiatives by the government turned out to be supportive for growth with the Reserve Bank of India being accommodative and the fiscal policy inclined towards growth, indicating the government’s desire to keep the expenditure to GDP inline,” said Manoj Dalmia, founder of Proficient Equities.

The Indian economy recovered sharply as Covid 2.0 waned with a pick-up in the vaccination drive. The benchmark Nifty 50 touched an all-time closing high of 18,477.05 on October 18, which was 49 percent higher than the pre-pandemic record.

“Our markets have kept rising on hopes of a faster return to normalcy and India emerging stronger and as a more attractive destination post a series of reforms that did not show any slowdown despite the pandemic,” said Deepak Jasani, head of retail research at HDFC Securities. “The flood of new investors post the Covid pandemic has also helped deepen the markets and diversify the source of funds.”

Now what?

The investor’s mind is now clogged with questions on what will happen in the markets after such a long bull run. Is there still steam left to scale new highs? Will the bubble burst and when? Should we remain invested or fold?

Experts hold mixed views on what lies ahead.

“The markets have run ahead a bit of corporate earnings, with the P/E of Nifty hovering around ~26x-27x,” said Mohit Ralhan, managing partner at TIW PE. Currently, the market is in a zone of caution and the coming Samvat is expected to be a year of normalisation, he said.

The markets are due for a reality check because companies are under pressure from rising commodity prices and supply chain issues, despite which valuations remain high.

“Based on historical valuation parameters, the Indian markets have reached the high end of the band of valuations,” Jasani said.

Other risk factors that the equity markets now face include a reversal of monetary stimulus, increase in interest rates across the globe and large, continued reversal of foreign portfolio investment (FPI) flows.

“Depending on the flows from FPIs, some more correction can happen in our markets in the near term, though this could throw up opportunities to add in select stocks,” Jasani said.

However, some experts are still optimistic about the growth of the market.

“Samvat 2078 now looks much brighter and more promising,” said Chadawar. “Cumulative and rolling net profit of the NSE 500 universe for the last four quarters has touched an all-time high with lossmaking sectors turning positive. Moreover, ROE for the broader market is improving after a muted performance for several years.”

Axis Securities is constructive on the long-term perspective of the market, so the strategy is to stay invested in the market, he said.

The most critical determinant for the market will be earnings growth. With the expectation of a faster economic recovery, more cyclical sectors are likely to join the rally in anticipation of higher government spending.

“We are entering a high earnings growth phase after an earnings growth recession witnessed from FY2014 till FY2020,” said Dadheech of Ambit Asset. “Earnings grew in mid-single digits between FY2014 and FY2020, whereas FY21 saw 14 percent earnings growth. The market is expecting 30 percent and 20 percent growth in FY22 and FY23, respectively.”

Ralhan of TIW PE has a more conservative view.

“Corporate earnings are expected to normalise with the catching up of the base effect and cost pressures due to the inflationary environment,” he said.

The next Samvat is likely to give normalised equity returns in low double digits, which means the Nifty hovering around 20,000, he said.

Dadheech is quite optimistic about next year, although he adds a word of caution and suggests that investors make sure they are invested in businesses that have the potential to print decent earnings growth alongside the economic recovery.

END