Indian markets have been touching new highs on an ongoing basis and the one question that market participants and investors seem to be asking is this: Is this growth sustainable?
Markets have remained volatile and are likely to remain range bound going forward. Expectations of a 25 bps rate cut by the US FED is already priced in and may not have an immediate impact as such. However, a 50 bps rate cut is likely to have a greater impact on the markets. The month of August witnessed a few ups and downs, despite the Nifty gaining over 1.66%, and closing slightly below the 25,250 mark.
Despite ‘Volatility’ marking the market, domestic demand continued to buoy Indian markets forward. The recent rally to an all time high has positioned India as the second-best performing market, trailing only Taiwan. Indian equities have been meting out consistent outperformance within the Emerging markets pack owing to its growing GDP, strong liquidity and positive corporate earnings growth. As a result, we’ve witnessed allocations of up to 20% in Indian equities within emerging market indices like the MSCI Emerging Markets Index. Data as of August 31, 2024, indicates that Indian equities are the second largest weight in the index, surpassed only by China.
Growth in India is a compounding story, one that has been leading us to making significant leaps owing to a supportive policymaking process. Despite the growth trajectory, IMF estimates India’s per capita income at USD 2,730 (as of April 2024) as compared to that of Japan at USD 33,140 and that of Germany at USD 54,290. However, India is expected to witness the highest per capita growth in the world, estimated at 5.4% p.a. during the period between 2024-2033 as per a report released by the Organisation for Economic Co-operation and Development (OECD) and the Food and Agriculture Organization (FAO).
The per capita income growth is extremely important as it leads to a more equitable distribution of income across the country, in addition to the creation of employment. It is also an indicator of growth of income in the hands of the end consumer.
Global geopolitical tensions and domestic challenges continue to pose long term threats with rising levels of unemployment, and an increasing income disparity remaining major concerns that the economic policymakers should be looking to address going forward. Despite net selling by FII’s to the tune of INR 20,339.26, domestic investors continued to pump in money into the tune of INR 50174.86 during the month of August 2024, leading to an overall inflow into the mutual funds space.
Consistent outperformance, increased demand and increasing levels of earnings have led to relatively higher valuations. While on one hand, there’s a massive growth potential that justifies valuations, the divergence between Large, Mid and Small cap stocks warrants attention. This valuation gap, combined with stronger fundamentals and a greater resilience when it comes to large cap stocks leads to a preferential tilt towards this segment. The relatively high valuations that we witness in the small cap space are driven by multiple factors, including higher earnings ratio and the limited supply of high-quality stocks in the segment.
One of the biggest mistakes that we’ve seen investors make over recent years, is to choose investment products based on past/recent performance. With the growth potential that themes like Infrastructure, Manufacturing, Defense, financials and consumptions are touted to offer, investors have been thronging to funds that fall in these sectors. However, taking a more detailed and pragmatic approach to investing and ensuring a long-term outlook is important. Thorough research and investing based on fundamental research remains key. Evaluating the underlying holdings across the funds and taking a detailed look at valuations remain important factors in an investor’s journey to meeting their return expectations.
We think that an investor’s ability to maintain a disciplined investing approach remains paramount, especially in a market like India. It’s crucial to remain grounded in fundamental analysis and ensure thorough risk management to ensure that investors realize their goals. It is also important to periodically rebalance an investor’s portfolio based on factors like underlying valuations and market direction. Going forward, diversification across sectors, with a bias towards areas that offer value and growth potential can help balance risk and returns.
We recommend that investors consider, strategies that fall under our Alpha Briefcase, that aims to identify small cap stocks that are trading at a lower PE as compared to their historical valuations, thus giving investors the benefit of investing in small caps with a significant upside.
