The next trillion will come from the unlocking of economy & growth story, say experts; economy-linked sectors to play crucial role

Read more: As India crosses $3 trillion m-cap, Warren Buffett indicator falls. Is it a sign of caution?

The market has seen a lot of change in its journey from $ 1 trillion to $2 trillion and $ 3 trillion marks.

Consumer and PSUs dominated Nifty in the year 1996 but in 2021, private banks and technology dominate the Nifty.

Brokerage firm Motilal Oswal believes as the second COVID-19 wave recedes in India and the pace of vaccination picks up in the rest of the year, the journey of the Indian market may become a little smoother.

Read more: India's market-cap at $3 trillion: RIL, TCS, HDFC Bank among top 10 stocks in Nifty

How long for the next trillion milestone?

Experts believe the long-term growth story for India is intact and post-pandemic India is likely to emerge as a stronger economy. As long as the vision of a $5 trillion economy is intact, India will continue to attract
investment.

Neeraj Chadawar, Head - Quantitative Equity Research, Axis Securities pointed out that India added a trillion dollars in the last 9 months ($2 trillion was hit on August 11, 2020, during the unlock rally in Indian
market).

"Historically, immediately after the global financial crisis similar upward earning momentum was seen for FY10 earnings which took a market cap to GDP to the range of 95-98 percent. With this positive earnings momentum in the current cycle, it is likely to see higher levels of m-cap to GDP in upcoming quarters," said Chadawar.

"As soon as a significant population gets vaccinated, then our economy could reopen at a faster pace. A recent trillion added in market cap was driven by unlocking trade and via global liquidity, the next trillion
will be added due to faster opening up of the economy and the growth story," said Chadawar.

Adding a trillion to the market cap means adding a trillion dollars to the Indian economy to keep the m-cap to GDP ratio intact at 100 percent.

Chadawar believes it will take another 2-3 years to add another trillion to the Indian economy. If the Indian economy grows faster than expected then we could achieve this milestone early.

Pankaj Pandey, Head of Research at ICICI Direct highlights an interesting fact.

"It is pertinent to note that while the journey of market cap from $1 trillion to 2 trillion took 10 years, the same from $2 trillion to $3 trillion took about 4 years. This is because the mathematical percentage of incremental trillion goes lower as the base increases," he said.

"Similarly, assuming an annual average return of about 10-12 percent in equities that we have seen over longer time horizon, the addition of next trillion milestone should ideally take 2-3 years to reach," said Pandey.

Gaurav Garg, Head of Research at CapitalVia Global Research also underscored it took almost 14 years to reach $3 trillion from $1 trillion which was touched in 2007 and 4 years from $2 trillion.

"In my opinion, the next trillion milestone should come in less than 4 years and we should be able to see the same in the CY 2024. Overall, in terms of
growth, around a year, got wasted because of COVID because of which we saw large scale disruption of economic activities, however, India has very strong fundamentals in place and once we are through with the pandemic, the real growth will come in fast," said Garg.

Nitin Shahi, Executive Director of FINDOC believes on a broader basis and past trend markets can give 12-14 percent compounding returns.

"Going by this trend, we may expect the Indian market to reach the $4 trillion mark by 2026 max or maybe before that," said Shahi.

Sectors that will lead

Most analysts believe IT and banks will lead the rally in the market's journey to the next trillion mark.

As per Chadawar, BFSI will be the biggest contributor for the next leg of the rally in the Indian market. The second will be the IT sector which will continue to do well for the next couple of years based on the double-digit guidance for FY22.

"As we are likely to enter a growth phase of Indian economy, economy-linked sectors will play a crucial role in reaching the milestone," said Chadawar.

Pandey believes sectors such as IT (strong deal wins, digitisation, hiring trends, operational efficiencies), banks (incremental pick up led by healthy deposit base and adequate capital adequacy) and consumer (expanding distribution network, premiumisation and pent up demand) are well poised to continue their growth trajectory and thus drive the rally going forward.

Garg is of the view that the technology sector, which is unaffected by the recent lockdown restriction will be an important part of this rally.

Another sector where Garg expects growth is PSU banking stocks.

"We might see a turnaround story in this pack. Although they do not carry much weight, they might act as a sentiment booster for our markets. Another sector to look for are private banks, FMCG and metal, where positivity is expected," said Garg.

Shahi believes with the commodities cycle in favour and the government's priority is on improving infrastructure, sectors like cement, steel, metals, realty and power can outperform the benchmark index.

"Banking will be the other big beneficiary of the change in Indian dynamics. Corporate banks like SBI, ICICI Bank and AXIS Bank are bridging the gap to retail lenders like HDFC Bank, Kotak Mahindra Bank in terms of valuations," Shahi said.

He is also positive on IT stocks. The IT index has outperformed the markets in the last year and is expected to perform decently going forward, he said.

Pharma and healthcare sector is expected to do well over the next years due to the COVID-19 pandemic, said Shahi.

"On the front of the stocks, blue-chips from banking - HDFC Bank, ICICI Bank, SBI, Kotak Mahindra Bank, from IT – TCS, Infosys, Wipro, HCL Tech and other sector leaders like Reliance Industries, Bharti Airtel, Bajaj Finance, Ultratech cement and Titan Will lead the way to $4 trillion mark," said Shahi.

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