The Indian stock market has been experiencing rich valuations, which analysts believe could trigger a near-term correction. However, this correction could present an entry opportunity for investors looking to capitalize on the market’s potential. Despite global uncertainty, the Indian economy is expected to remain relatively stable due to its strong macro-financial fundamentals.
In the past year, midcap and smallcap indices have outperformed the Nifty 50 by significant margins, with a 24% and 31% outperformance respectively. This trend is expected to continue, with more aggressive sectoral rotation in the future.
Seshadri Sen, Head of Research and Strategist at Emkay Global Financial Services, highlights India’s fortress balance sheet, which is robust across various fronts such as public finance, external accounts, banking systems, and corporate leverage. This strength in fundamentals contributes to India’s durable growth story and limits the impact of external uncertainties. Additionally, the reduced dependence on overseas investors in the Indian equities market is seen as a positive factor in weathering periods of uncertainty.
Sen emphasizes that the premium valuations in the Indian stock market are supported by factors such as better earnings growth quality and a broadening investor base. The country’s macro stability is evident in the collapsing country risk premium over the last five years, while growth predictability and earnings quality have also improved.
The analyst notes that the investor base in India has expanded, with reduced reliance on Foreign Portfolio Investors (FPIs) contributing to higher valuations. Despite concerns about the Nifty’s high price-to-earnings ratio, Sen believes that the market is not likely to become significantly cheaper, with the long-term average of 19.9x PER presenting an attractive entry point.
Looking ahead, the SMIDs (small and midcaps) are expected to continue outperforming, although the next phase of the market is anticipated to be more balanced. Manufacturing and SMID sectors are showing relative strength in valuations, which could lead to a decrease in levels of outperformance. Sen predicts a comeback in mass consumption, which could drive earnings growth and upgrades in sectors like FMCG and value retail.
However, there are risks on the horizon, including global risk-off sentiment, political instability, and regulatory risks that could trigger a short-term sell-off in the Indian stock market. In the event of a correction, Sen views it as an entry opportunity for long-term investors. He suggests that sectors like IT and FMCG could be safer havens during a correction, as they are likely to correct less than manufacturing and cyclicals.
In conclusion, while the Indian stock market may face near-term corrections due to rich valuations, the country’s strong macro-financial stability and broadening investor base provide a solid foundation for long-term growth. Investors are advised to seek advice from certified experts before making any investment decisions.