The current domestic rally stands on solid ground, Sensex is poised to potentially breach the 80,000 marks. This surge began with the formation of a stable coalition government, instilling confidence among investors. Since June 4th, major indices have climbed 10%, significantly reducing the country’s risk profile by reversing net outflows (QTD) from FIIs. The India VIX index, which peaked at 26.75 on June 4th, has since halved to 13.8, indicating a notable decrease in market volatility. This positive trend has particularly benefited heavyweight sectors such as finance and consumer goods, with FIIs showing renewed interest after months of net selling in April and May.
This market rally is also underpinned by positive expectations for the upcoming budget. There is a growing sense of optimism that the newly formed government, committed to pro-growth policies, will expand on this agenda through a range of measures in the upcoming fiscal year. Simultaneously, the government is expected to strike a balance between growth and populist benefits. These initiatives are crucial for promoting prosperity, especially among rural and lower-middle-class populations, given the widening income gap and varying public sentiments.
This week, there has been signs moderation in the overall market momentum, particularly with mid- and small-cap stocks consolidating due to their premium valuations. From 4th June, large caps are up by 10%, while the broad market is up by 11% indicating a reduction in outperformance by mid & small caps. This underperformance can continue in the short-term after the rapid performance of the broad market YTD, which is up 16% compared to 8% of Nifty50. Profit booking is also emerging due to concerns about the slow progress of the monsoon and heatwaves in northern India, which are impacting short-term demand, however we believe that it is a fleeting issue.
At this peak market phase, there is evident sectoral rotation from high-priced stocks to those considered value stocks. New buying is noticed in private banks, telecom, IT, and consumer durables. This week is a finance-driven rally, while profit booking was evident in realty, power, metals, and midcaps.
On the global front, sentiment has improved as there is an increased probability of a rate cut by the BoE in August. Similarly, in the US, there was a rise in jobless claims, and weak housing data has raised expectations of a rate cut in September. Domestically, there is anticipation of GST rate rationalization in sectors such as textiles, fertilizers, and banking, with a meeting due in August. This is expected to drive sector-specific developments in the near term.
The inclusion of Indian bonds in the JP Morgan EM bond index is a meaningful development for the Indian economy with profound long-term implications. While its direct impact on the stock market may be limited, this development strengthens the domestic economy and local currency. It is expected to ease rates in the medium-term, reduce the discount rate or country risk, and improve the earnings outlook in the long-term, which is positive for equity. It is also expected to ease inflation due to marginal appreciation or a reduction in the rate of INR depreciation. This will reduce the cost of imports and even lead to faster than expected rate cuts by the RBI in the medium-term.
To summarize, recent developments over the past month have largely been favourable. The only concern is the high valuation in anticipation of a low level of teen earnings growth in FY25 & FY26, which will limit super returns in short-term. Well, earnings growth is at upside risk due to an upgrade in the GDP growth forecast, as indicated by the RBI in its June policy, opening plausibility of further upgrade in earnings in the coming quarters. Overall, the stock market is currently performing strongly without any evident negative factors to hinder its progress. Notably, India has begun to outperform the rest of the world, which was missing YTD.
First published in Mint
