Christopher Wood, global head of equity strategy at Jefferies , believes the recent run-up in equities is largely a bear market rally in the US that Indian stocks are tailing. The rally, Wood said in an interview, is driven on hopes that inflation pressures have peaked, adding he was ‘suspicious’ about the rallies—both in the US as well as India. But Wood said he is still betting big on India, his favourite market over a 10-year period. Wood is probably right, in the sense that rising interest rates and elevated oil prices could hurt consumption spends in the near term. Also, even as urban demand is on an uptrend, there are no clear signals yet from the rural markets, and the monsoon has been rather uneven. Corporate results for the June quarter are somewhat subdued—though revenues have grown well, high commodity prices and inflation across inputs have dented margins. For a sample of 837 companies (excluding banks and financials), ebitda margins are down some 360 bps year-on-year. Indeed, FY23 could be rough for India’s external sector, with the current account deficit widening to more than 3% of the GDP and weighing on the rupee.
Though the India story with its large consumer market and top-class companies that cater to these consumers holds promise, foreign portfolio investors (FPIs) seemed to believe that the valuations were exalted, given the macro-economic headwinds and the depreciating currency. Between October last year and June, they sold $33 billion worth of stocks, taking their ownership of the BSE 500 to 18%, the lowest since 2012. Against that background, even tentative steps (the purchases in July were close to $650 million) taken by the FPIs back into the Indian markets is good news. It probably would take a while for the flows to become more meaningful, given stocks in other emerging markets are more attractively valued.
In the meanwhile, local investors—wholesale and retail—who have supported the markets, making them remarkably resilient through the past year, continue to invest. Retail investors have become quite a cohort over the past two years, encouraged by the ease of online trading. Their share of companies listed on the NSE hit an all-time high of 7.32% in the December 2021 quarter, despite the Nifty’s 1.5 % decline during that period.
With interest rates on bank deposits not enticing enough, more retail savings are likely to find their way into the stock markets either directly or via mutual funds and other investment schemes. To be sure, gross equity flows into mutual funds were down 40% in June over March levels due to choppy markets, but the net flows were fairly good. Again, data on Systematic Investment Plans shows they are holding up reasonably well. Savings are also being parked in portfolio schemes.
The point is that with the Indian corporate sector doing remarkably well over the last several years, there are now many more believers. There is confidence that quite a few companies can continue to earn handsome profits even if the economy doesn’t. This decoupling between the economy and the markets isn’t new; it has been seen before. That is the reason the Sensex and the Nifty are trading at a not-so-inexpensive 21.5-22 times estimated FY23 earnings. Investors aren’t in a hurry, they are willing to wait for the returns. Like Wood, they too believe that over the long term, India’s a good bet.