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

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

The K-shaped recovery trend post covid continued over the past year. Consumption at lower income segments continued to be relatively subdued. Central banks across the globe, including the RBI, were forced to raise policy rates to tackle raging inflation.

Unlike past rate hiking cycles, there were no extreme reactions following the rate hikes. India’s prudent monetary policy post covid minimised the need for massive rate hikes. Rangebound interest rates ensured that the growth momentum was not disrupted.

BSE Sensex recorded a return of 7 per cent over the past one year. Muted returns amid steady earnings growth led to a marginal correction in valuations in the large-cap bucket over the past year. Meanwhile, BSE Midcap and BSE Smallcap indices staged a remarkable performance delivering 28 per cent and 33 per cent respectively. The outperformance was driven by robust flows into these categories, likely following their strong recent performance.

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Share of combined flows into midcap and smallcap categories over the past year stood at nearly 43 per cent versus nearly 28 per cent over the past three years. Though valuations across categories are around the long-term average, there is a significant dispersion of returns within small and mid-cap categories.

Corporate profitability has been on a strong footing over the past year. The two key factors that supported the corporate profits are input price moderation and strong capex momentum. Capex momentum is majorly contributed by robust government spending enabled by reasonable tax collection.

Going forward, there is a good chance of private capex revival over the next year as utilisations are nearing a reasonable level. Banks are in a good position to support the credit demand as they are in a favourable NPA (Non-Performing Assets) cycle.

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Having deleveraged significantly over the past few years, corporate balance sheets have the leeway to take on debt to fund the next leg of expansion.

As inflation is moderating, corporates may not require material price hikes from here on. Though margins could moderate from current levels, improved affordability can ensure reasonable demand growth.

There is renewed push and policy support for Indigenisation. Low wage levels and a large young population augur well for a manufacturing push.

The rising share of digital transactions and increasing formalisation are other factors which 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.

Steady mutual fund flows throughout the year ensured stable markets even during months of high FPI selling. Indians have been under-invested in equities historically.

Though the share of equity assets in Indian household assets has more than doubled over the past decade, equity forms just about 4.7 per cent of Indian Household assets (Data as of FY23).

The advent of smartphones and digitisation has led to better awareness about the importance of equity investing. This has led to robust growth in the Mutual Fund AUM (assets under management) over the past decade.

Total mutual fund AUM and mutual fund’s equity AUM have become nearly six times and nearly 12 times respectively over the past decade (Source: AMFI, Data as of Sep 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.

Shareholding of mutual funds across market cap categories has increased over the past few years. Stable domestic participation could lead to lower volatility in years to come.

The following table shows the weighted average shareholding and return profiles across market cap categories. Stocks are sorted in the order of market cap. Total return including dividends are considered while computing average and median total return.

Median total return indicates the middle value of return within each category when sorted in order of returns. A high deviation between average and median total returns indicates that certain stocks within the category could have delivered outsized returns leading to potential 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 prominence of mutual funds (MF) and individual investors (non-institutional holding) substantially increases as we go down the market cap ranks. Performance across market cap categories is reflective of flows by principal shareholding categories.

(Note: All return figures are as of Oct 31, 2023, unless specified)

Potential risks

Despite the positives, there are a few potential risks to watch out for. The impact of deficient rainfall on inflation and rural demand would have a bearing on consumer demand. The high global interest rates could impact the export demand.

Any political uncertainty as we near the election period could lead to short-term volatility. Any development in geopolitical tensions also needs to be monitored. An escalation doesn’t seem to be the base case at this point.

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

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Also Read: ‘Diwali 2023: Market outlook positive for Samvat 2080; several midcaps, smallcaps available at reasonable prices’

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

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

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Updated: 12 Nov 2023, 03:35 PM IST