As with the pandemic, the rally in India’s equity markets is also unprecedented. Life and the economy came to a standstill and are still recovering. However, during this challenging period, the stock markets, since November 2020, constantly climbed to new highs without any fear or effective corrections.
The Nifty 500 had run up by 148 percent from Covid lows and by 46 percent from Diwali 2020, while the broader market performed even better than the main indices.
The key factors that helped, despite dismal corporate earnings growth, are:
1) Unconditional support of central banks and governments with their easy monetary and expansionary fiscal policies, which made the equity markets more attractive than low-interest assets.
2) Strong inflows by Indian retail investors and continued support from domestic institutional investors.
3) Pandemic-led benefits for Indian sectors including IT due to the increased need for digitalisation, pharma due to quality R&D and supply of drugs, and chemicals due to the shift of businesses from China.
4) The China-plus-one strategy, which improved the business and outlook of Indian sectors from electronics to textiles.
5) Government efforts to supplement India’s growing economic strength by announcing new-age reforms with a focus on manufacturing, which is visible from the increase in greenfield, FDI and FIIs inflows.
6) Focus on renewable energy, electric vehicles and power sector reforms, which uplifted the power and capital goods sectors.
Categorised support to the finance market, companies and small businesses did not weaken balance sheets, but lifted the equity outlook after the one-time fall in March-April 2020. Constant reforms and effective Covid-19 management led to a strong outperformance by India compared with its Asian and emerging market peers. The benefit of reforms and further reopening of the economy will continue to support the Indian market in the long term. As a result, we should have a constructive view on the Indian equity markets.
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However, at the same time, the performance of the equity markets will be challenging in the short to medium term due to the normalisation of the easy money policy and super inflation. This will impact the liquidity and profitability of companies. Valuations are at peak levels, making equities vulnerable due to lack of headroom and increased volatility.
What investors need to do is to have a defensive portfolio with a balanced mix of defensives, upcoming sectors, debt and cash. Defensive stocks like IT, pharma, FMCG and telecom will help to overcome volatility.
A fair mix of investments would include new generation companies such as startups and those in online businesses, renewable energy, electric vehicles, power, chemicals, textile and electronics. These are expected to be part of the next trend of high-growth businesses supported by technology, reforms and global demand.
Today, such businesses are trading at high premium valuations due to high demand and low earnings. They are expected to continue to trade at a premium valuation on a long-term basis. However, caution should be exercised on heavily valued companies that are expected to maintain low profitability in the short to medium term.
We can anticipate a market rectification in the short to medium term. If done, we should capitalise by buying aggressively. In the near term, the systematic investment plan method and value buying should be the investment strategy.
The focus can be more on large cap shares because mid- and small-cap stocks can underperform in the medium term. Large caps are better placed to benefit from this new business format and the re-opening of the economy. Buying on dips will be the best strategy in this muted trend.
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