While disappointing corporate earnings and a fear of higher interest rates is creating a cautious mood among investors, there are some who repose confidence in Indian equities over the longer run. And there are some who see the National Stock Exchange’s Nifty 50 index scaling closer to a new high by the end of 2023.
ICICI Securities pointed out that the Indian benchmark is undergoing higher base formation over past three months after reversing its 2022 declines of 18 percent and recording new highs in December 2022.
The 50-stock index had hit a lifetime high on December 1, 2022, at 18887.60 points.
The brokerage firm added, “While the index has factored in various headwinds in the process, the current context is very similar to that of CY13, CY16 and CY18 phase. In each of these identical instances, higher base formation consumed around three to four months and retraced preceding upmove by around 50-60 percent, followed by the index challenging new highs over next quarter.”
“My sense is, by December, we should be very close to a new high,” said Niket Shah, senior group vice president and fund manager, Motilal Oswal Asset Management Company.
A lot of the negative news including inflation and rural slowdown and weak earnings growth are getting discounted in the market at this point so one could witness a bit of a selloff in the near term, but we are very close to the bottoming out of the consolidation phase which the market has been over last 18 months he said.
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However, Shah believes that a pre-election rally post October and anticipation of rate cuts going into early 2024 would help indices climb towards a new high.
The latest minutes of the US Federal Open Market Committee had sparked a fear among investors that policymakers there may tilt towards raising interest rates by 50 basis points.
Apart from higher interest rates, some participants also highlighted corporate earnings as a trigger for downside in the near term.
“Earnings trajectory continues to be tad disappointing with continued margin pressures and muted demand. The earnings growth estimates are now veering towards low double-digit levels and turning out to be increasingly vulnerable,” said analysts at Dolat Capital Market.
The note added, “The MPC (Reserve Bank of India’s monetary policy committee) will now likely consider another hike in its April meeting which was earlier a pause in our base case. With that, lending rates will be higher than what we believe is the red line for mortgages and durables.”
BNP Paribas Securities India expects pressure on foreign flows with the US Federal Reserve tightening and China reopening and on local flows from rising term deposit rates.
Jefferies highlighted that India’s underperformance compared to other emerging markets might end soon. The foreign brokerage said the Nifty 50 has typically traded at a premium to emerging markets peers with an average price to earnings premium of 61 percent over the past 10 years. The strong outperformance of India over 2021 to October 2022 drove India's PE premium to a high 101 percent and since then, as India underperformed, the PE premium has quickly reverted to the average levels, it added.
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