One of the striking points in this year’s global equity sell-off has been the relative fortitude showed by Indian stock market. Year to date, US (Nasdaq) is down over 11 per cent, Russia (MOEX) has fallen 8.3 per cent, China (CSI 300) and Korea down over 7.5 per cent each. Benchmarks of Netherlands, New Zealand, Australia, Germany, Japan, Taiwan and France have dipped 3-6 per cent YTD.
In this time period, India’s Nifty 50 is up by about 1 per cent, in a gravity-defying display amid others capitulating. There seems to be three key reasons for this.
Growth prospects strong
India’s strong growth outlook partly explains the continuing resilience despite perceived high valuations.
“The accelerating growth story is reflected in rising earnings forecast. The consensus earnings growth forecast for the MSCI India this year is 20.3 per cent, compared with 11.3 per cent for the Asia ex-Japan region,” said Jefferies global head of equity strategy Christopher Wood in a note to clients.
Yes, the Nifty trades about 20.5 times 1-year forward earnings, well above historical range. While the market has dipped compared to the peak hit in October 2021 and foreigners have pulled out $4.9 billion from equities in 2022 so far, the fall has been counterbalanced to an extent by continuing healthy inflows from domestic institutional investors, led by mutual funds, pumping in $3.2 billion YTD.
Says S Naren- ED and CIO, ICICI Prudential AMC, “Retail investors in India have played a significant part in equity market since March 2020. This has been largely because of the positive sentiment due to strong domestic macros, good shape of corporate and financial sectors which is also visible through the strong earnings performance delivered thus far. Owing to these factors despite global equity sell-off, Indian markets have been steady.”
Dealing with Fed fears
Secondly, there is an understanding that today, the situation is different from the 2013 “taper tantrum” episode, because India’s macro stability indicators are mainly in better shape now. The RBI is expected to be watchful of a spill over impact from tighter Fed policy and appears
prepped to drive the policy response mindful of not disturbing the pace of the domestic growth recovery, feel market participants.
There is a growing belief that Indian benchmark indices are not as susceptible to Fed actions than, say, US market. Says Radhika Gupta, MD & CEO, Edelweiss Asset Management,
“US indices have a large representation from new age and tech businesses that are highly sensitive to interest rate changes, as they derive a lot more value from future cash flow. Whereas, India’s frontline indices are mainly dominated by financials and have underrepresented new-age tech businesses”
For instance, even the diversified S&P 500 index’s top holdings are Apple, Amazon, Alphabet (Google), Netflix, Tesla and Meta (Facebook), which is a reason for the 6 per cent YTD decline.
India premium
Another key factor is the India premium, which continues to draw in investors. Post pandemic, India has been singled out for some special treatment - it’s the only emerging market that had positive FPI flows in both calendar years 2020 as well as 2021.
“We are just beginning a new economic cycle with the government prioritizing growth and corporates indicating significant capex around the corner,” says Aashish P Somaiyaa, CEO, White Oak Capital Management.
Going into the Budget, Indian equity markets did appear weak, but sentiment has improved for the better as FM unveiled a pro-growth bias Budget with government’s policies clearly aimed at infrastructure creation, and reviving the rural economy. All this, without increasing macro stability risks. So, it was a Budget that had very few misses as far the equity market is concerned, further calming any frayed market nerves.
“We are looking at a new capex cycle and, hence, a new profit cycle. That augurs well for our overweight sectors: Financials, Discretionary Consumption and Industrials,” says a Morgan Stanley research report.