After a tepid 2081 that saw benchmark indices returning less than 6%, the good news is that most market experts believe that things will get better from here. However, they also said that it would be a good strategy to take the safer haven of large-caps.
Said Sankaran Naren, executive director and chief investment officer, ICICI Prudential asset management company, “From a valuation perspective, large-cap stocks are better placed than mid- and small-caps at this stage.” He added that large caps not only offer better valuation comfort but also stronger earnings visibility. In contrast, smaller companies can see sharper corrections when market sentiment changes.”
As far as valuations go, the Sensex’s price-to-earnings (P/E) ratio is marginally up from last year’s Samvat at 23.22x (23.13x in 2080 November 1), the BSE Micap’s P/E is down from 40.43x to 33.41x and BSE Smallcap’s P/E has gone up from 33.62x to 33.98x.
The consensus is that the worst, definitely, seems to be over. Said Shankar Sharma, founder, Gquant Investec, “Last Diwali to now has been quite a bad year for Indian equities. But as was clear in September 2024, we were in an aging bull market. We might see a bit of a catch up rally in India this year.”
Naren explained that a year ago, Indian equities were among the most expensive globally. However, persistent outflows from foreign institutional investors and global trade-related uncertainties weighed down on sentiment, leading to muted returns. “Given this backdrop, we believe Indian equities are actually better placed now than they were last year,” he said.
Industry experts like A Balasubramanian, CEO, Birla SunLife Mutual Fund are quite upbeat with the recent consumption push that the government has given to the economy through the implementation of the Goods and Services Tax (2.0). “Overall, the festive season has begun well, if one goes by the narrative coming from automobile passenger vehicle sales. The GST cut ahead of festival season has also resulted in producers of goods dropping the price and focusing on improving the volume.”
He added that while the economy comes back to growth path gradually, we will also benefit from any favorable outcome that is expected from the tariff negotiation in the first week of November.
Sharma, however, does not expect the markets to do remarkably well. “…but returns are unlikely to beat other markets,” he added. In other words, while the worst might be over, we are unlikely to see a bull run in 2082. “
Brokerage calls:
As far as brokerage houses go, most believe that things are expected to get better due to cut in GST rates, income tax benefits given in the Union Budget and improvement in corporate earnings. Analysts at Motilal Oswal wrote “We believe this marks the beginning of a turnaround in India’s domestic growth momentum, with significant pick up in consumption paving the way for a robust revival in the private capex cycle.” This, along with the improving earnings trajectory, should lend support to Indian equities,” they added.
According to Axis Direct, year-to-date, the Indian market has underperformed the US market and other emerging markets by a notable margin. The FTSE India Index is currently trading at a P/E premium of 49% to the EM Index, compared to its historical average premium of 44%. In September 2024, the Indian market was valued at a significantly higher premium of 97% to EM peers. “Following the recent correction, the current 49% premium appears more reasonable and offers a relatively attractive entry point when viewed against historical valuations,” the report added.
ICICI Direct expects double-digit earnings growth to resume from FY27E onwards, which should ensure healthy equity returns going forward. “Our one year forward Nifty target is placed at 27,000 levels (22x PE on FY27E),” the report said.
Advice to investors:
We are bullish on equity and it is time to invest and continue the investment from a medium to long term point of view,” added Balasubramanian.
Naren, while advocating asset allocation despite the near-zero returns for individual investors, said that staying disciplined, avoiding chasing short-term fads, and focus on building a balanced portfolio that can weather market cycles will be the way to do.
“For investors considering lump-sum investments this Diwali, a hybrid strategy can be a smart choice as it provides asset allocation automatically and helps manage risk better. For those preferring a staggered approach, systematic investment plans in large-cap, flexi-cap, and multi-cap funds is a prudent way to participate in the market,” he added.
Hybrid funds are balanced advantage, equity savings and other funds in which allocation between equity and debt happens based on models like buying more when markets are cheap and selling when markets are high.