Market outlook for Samvat 2080: Indian stock market on a good wicket; positives outweigh potential negatives

However, India’s policy stance ensured that India was not materially affected by global geopolitical tensions. Despite the negative flow of economic news from the global markets, the stable corporate earnings cycle and reasonable domestic equity flows led to positive returns in the Indian markets.

The post-covid K-shaped recovery trend continued over the past year. Consumption by lower income segments continued to be relatively low. Central banks across the globe, including the RBI, have been forced to raise policy rates to combat raging inflation.

Unlike past rate hike cycles, there were no extreme reactions following the rate hikes. India’s prudent post-covid monetary policy has reduced the need for massive rate hikes. A limited range of interest rates ensured that growth momentum was not disrupted.

BSE Sensex recorded a return of 7 percent in the last one year. Muted returns amid steady earnings growth resulted in a marginal correction of valuations in the large-cap bucket over the past year. Meanwhile, the BSE Midcap and BSE Smallcap indices showed stellar performance delivering 28 percent and 33 percent respectively. The outperformance was driven by strong inflows into these categories, likely following their strong recent performance.

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The share of combined flows into the mid-cap and small-cap categories over the past year was nearly 43 percent compared to nearly 28 percent over the past three years. While valuations across categories are around the long-term average, there is significant dispersion in returns within small- and mid-cap categories.

Corporate profitability has been on a strong footing over the past year. The two main factors that supported corporate profits were input price moderation and strong capex momentum. Strong government spending is a major contributor to Capex momentum enabled by decent tax collection.

Going forward, there is a good chance of a revival of private capex for next year as utilizations are approaching a reasonable level. The banks are able to support the credit demand because they are in a favorable NPA (Non-Performing Assets) cycle.

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After significant deleveraging in recent years, corporate balance sheets have the opportunity to take on debt to finance the next phase of expansion.

As inflation is easing, corporations may not need a material price increase going forward. Although margins may moderate from current levels, improved affordability can ensure reasonable growth in demand.

There is renewed pressure and policy support for Indigenous peoples. Low wage levels and a large young population bode well for manufacturing pressure.

Growing share of digital transactions and increasing formality are other factors that would help the Indian economy in the medium term.

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Apart from a supportive macro environment, strong domestic flows prevented a material correction in markets.

A steady flow of mutual funds throughout the year ensured stable markets even during months of high IPT sales. Indians have historically underinvested in equities.

Although the share of equity assets in Indian household assets has doubled over the past decade, equity accounts for just about 4.7 percent of Indian Household assets (Data as of FY23).

The advent of smartphones and digitization has led to greater awareness of the importance of equity investing. This has resulted in strong growth in Mutual Fund AUM (assets under management) over the last ten years.

Total mutual fund AUM and mutual fund equity AUM are almost six times and almost 12 times respectively in the last decade (Source: AMFI, Data as on September 30, 2023).

As the per capita income of a rising middle-class population crosses the subsistence level, there is a reasonable chance of higher retail participation in equities.

Mutual fund shareholding across market cap categories has increased over the past few years. Stable domestic participation could lead to lower volatility in the coming years.

The following table shows the weighted average shareholding and return profiles across market cap categories. Stocks are sorted in order of market cap. The total return including dividends is considered when calculating the average total return and the average total return.

The median total return represents the average value of the result within each category, arranged in order of results. A high deviation between average total returns and average total returns indicates that certain stocks within the category may deliver outstanding returns leading to potentially unsustainable valuations.

Weights are derived from the market cap share of each stock within its segment. Unlike the large-cap category (top 100 companies by market cap), the visibility of mutual funds (MF) and individual investors (non-institutional holdings) increases significantly as we move down the market cap ranks. Performance across market cap categories reflects flows by key shareholding categories.

(Note: All return figures are as at October 31, 2023, unless otherwise specified)

Potential risks

Despite the positives, there are some potential risks to watch out for. Deficient rains would affect inflation and rural demand on consumer demand. The high global interest rates could have an impact on export demand.

Short-term volatility could come from any political uncertainty as we approach the election period. Any development of geopolitical tensions must also be monitored. Promotion does not appear to be the underlying reason at this point.

Despite near-term volatility, potential positives outweigh negatives in the medium term. Investors can allocate to equities in a staggered fashion.

Also Read: Stock Markets and Diwali 2023: What could be the biggest challenges for Nifty 50 in Samvat 2080? Analysts explain

Also read: ‘Diwali 2023: Positive market outlook for Samvat 2080; some midcaps, small caps available at reasonable prices’

(The author of this article is a Fund Manager – Equity at Quantum Mutual Fund.)

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Disclaimer: The opinions and recommendations above are those of the author of this article, not of Mint. We encourage investors to check with certified experts before making any investment decision.

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Updated: 12 November 2023, 03:35 PM IST