Where are we in this bull phase?
This bull phase was born on the pessimism of the Covid outbreak when Nifty crashed to 7,511 in March 2020. For the next eighteen months, we had a one-way rally born on skepticism, which took the Nifty to 18,604 in October 2021.
After a consolidation phase lasting more than a year, the bull is charging again. We are not yet in the stage of euphoria.
The rally is global:
Even though the recent rally didn’t come as a surprise, the ferocity of the rally took most investors by surprise. Broadly, there are two factors driving this rally: one, global and two, domestic.
It is important to understand that the ongoing stock market rally is global. In the mother market US, the S&P 500 is at 52-week high; Euro Stoxx 50 is at a 52-week high; Germany has tipped into recession, but the DAX is at 52-week high; French CAC is at a 52-week high; the Japanese Nikkei is roaring with 24 percent YTD returns; in South Korea and Taiwan indices are at 52-week highs; in India Nifty and Sensex are at record highs. This is a global rally.
The fear was overdone:
Markets often overreact, both on the upside and downside. When reality dawns, the excesses will be corrected. Last year, globally, markets corrected with big downturns in the developed world.
In the mother market US, Nasdaq corrected by more than 30 percent. Markets were reacting to the aggressive monetary tightening by the US central bank Fed.The market fear was that the US economy will tip into a recession in 2023, perhaps by mid-2023, impacting global growth.
The majority of economists and market experts felt that a US recession was inevitable; many feared a hard landing for the US economy. In 2022, markets discounted this concern.
But what is the reality now? A US recession is nowhere in sight: 2024 Q1 GDP growth at 2 percent was 50 percent higher than estimates. Monetary tightening by the Fed has paid off with US CPI inflation declining from the peak of 9.2 per cent in to 3 per cent in June 2023.
The labour market is extremely tight, and unemployment continues to remain at a 50-year low of 3.6 per cent. The ongoing rally confirms Fed chief Jerome Powell’s remark that “the case of avoiding a recession is more likely than having a recession.”
Indian economy is in a sweet spot:
The domestic factors sustaining the rally are India’s strong and improving macros and the flood of FPI inflows triggered by these fundamentals.
The Indian economy is in a sweet spot with impressive GDP growth, declining CAD, stable currency, and promising leading indicators like rising PMI, sustained steady growth in GST and direct tax collections, and resilient credit growth.
The primary factor that has triggered this rally is the ‘U’ turn in the FPI strategy from ‘Sell India, Buy China’ during January and February this year to ‘Buy India, Sell China’ during the last three months.
The initial enthusiasm triggered by China’s post-Covid opening up in early 2023 has not been sustained. Chinese macros and demographics indicate a sharply slowing Chinese economy and declining prospects for investment in China.
Furthermore, India is now regarded by foreign investors as a major long-term beneficiary of the China Plus One policy pursued by the developed world, particularly the US.
It is this changed perception of India vis-à-vis China that has triggered massive FPI flows into India. FPIs who sold stocks for Rs 34,626 crore in the first 2 months of 2023 turned massive buyers and bought stocks for Rs 43,838 crore and Rs 47,148 crore in May and June, respectively. The buying trend continues in July.
At 19,500, Nifty is trading above 20 times FY24 estimated earnings. Considering India’s bright growth prospects, India deserves a higher valuation than the historical PE multiple of 16.
But from the near-term perspective, at a PE multiple of 20, the market is running ahead of fundamentals. The market is not yet in a euphoric phase, but it is time to be cautious.
(The author is Chief Investment Strategist at Geojit Financial Services)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)