Sensex & Nifty down over 1%: Why investors can still remain bullish on Indian equities at this time

Sensex & Nifty tank: Most of India’s major equity indices, including the Nifty 50, Nifty midcap 150, and Nifty small cap 250, are currently providing returns that are greater than historical averages. This is true for practically all time scales ranging from seven days to five years. Because markets frequently mean revert, i.e., present returns come back to prior averages, the description above appears to imply that the Indian equities markets are likely to be in a corrective mode in the near future.
In such a case, the advise to investors should be to reduce their equity exposures. However, while we do not rule out the possibility of relatively minor market corrections in the near term, we believe that the rally in Indian equities, particularly large and small cap companies, will continue, and investors should remain invested. Moreover, if they have investable funds and a reasonably long investment horizon they can invest in the equity market. There are numerous reasons for us to make this seemingly contradictory decision.
In the last two-years, equity returns in India have been lower than historical averages. Small cap stocks have underperformed particularly noticeably. As a result, the current rally over the previous year has been more of a mean reverting catch-up than a rally powered mostly by liquidity and hope.
Equity markets are primarily driven by five elements in the medium to long term: macroeconomic fundamentals, corporate fundamentals, money flowing into the equity market from both foreign and domestic investors, and company valuations.
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It is widely acknowledged that India’s macroeconomic fundamentals are far superior to those of any other systemically important country. According to reliable authorities such as the International Monetary Fund, India would remain the world’s fastest expanding major economy in each year between 2023 and 2028. Since late 2020, corporate performance has been ahead of analyst and market forecasts. We anticipate that this tendency will continue.
Following a significant outflow in 2022, foreign portfolio managers have invested about the same amount in Indian equities in 2023. We see no rationale for significant withdrawals from Indian equities in the near future, given the country’s robust macroeconomic and corporate fundamentals. Domestic money flow into the equity market has been substantial and growing.
Nonetheless, Indian households’ allocation to equity and related assets in their portfolios remains low. We anticipate that the trend of raising allocations in equities will continue, especially with increased investor awareness and knowledge. On the basis of prior earnings, the valuation of listed Indian companies may appear a little stretched. However, when future earnings are considered, Indian shares appear to be fairly valued.
These are the reasons why we remain bullish on Indian equities at this time. However, stock investors must remember that equities are inherently volatile in the near run. As a result, market corrections in the short term cannot be ruled out. Consequently, investors should only invest in equities assets if they have a longer investment horizon than 12 months, ideally three years. Otherwise, investing in shares becomes speculative, a hazardous endeavour, rather than investing.
(The author is Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers.)