India’s key benchmark index Nifty50 hit the 20,000 level for the first time ever on Monday and is hovering around that mark.
A relatively firmer macro-economic position coupled with inflow of foreign and domestic funds is keeping the optimism high among Indian stock market participants. Nonetheless, this rally comes at a time when the global economic outlook is grim. The jury is still out whether the US Federal Reserve’s (US Fed) monetary policy cycle is complete. Plus, oil prices have started to climb northward. Higher oil prices tend to have repercussions on global inflation outlook, and especially for oil importing countries such as India.
The September BofA Securities Glo-bal Fund Manager survey showed that net 53% fund managers are pessimistic about global growth in the next 12 months. A key takeaway from the survey was that China growth optimism has slumped back to lockdown lows. In fact, no fund manager survey by BofA Securities expects stronger economic growth in China in the coming days.
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The findings on inflation are discouraging, too. According to the survey report, inflation expectations have jumped to the highest since May 2022. With that, sticky inflation and hawkish central banks are still seen as risks to portfolios. This is followed by worsening geopolitical tension.
The US Fed is likely to hike interest rates one more time by 25 basis points by the end of 2023. “After which we expect policy rates to remain stable but elevated, likely through the end of next year,” said Saira Malik, chief investment officer, Nuveen, in an 11 September report. She foresees a soft landing or mild recession sometime in 2024. “The plot could thicken if climbing oil prices continue, driving a rebound in overall inflation and prompting a vigilant Fed to hike more than once in the near to medium term,” she added.
As things stand, global fund managers are no longer extremely bearish, but they are not bullish yet, said the BofA survey report.
In this backdrop, Indian investors should not get carried away by the Nifty rally. Further, there are worries that midcap and smallcap stocks may have run ahead of their fundamentals. “The primary driver of the rally appears to be irrational exuberance among investors, with high return expectations (and purchase decisions) being driven by the high returns of the past few months,” said analysts at Kotak Institutional Equities in a report on 11 September. The brokerage has dropped its recommended midcap portfolio since it cannot find too many stocks beyond the BFSI space that offer decent potential upside to their 12-month fair value.
There are other downside risks, too. For instance, deficient/erratic monsoon which can adversely impact crop output and drive prices higher, keeping food inflation elevated. Supply side intervention by the government might keep a check on rising prices, but sticky inflation could push rate cut expectations ahead in India. In August, inflation measured via the consumer price index rose to XX.
Amid this, how demand pans out in the upcoming festival season would be a crucial gauge for India Inc.’s FY24 earnings outlook. “We remain watchful of how the monsoon pans out and where crude settles. This can have an overbearing impact on the consensus FY24 Nifty earnings per share estimates of 15%,” said Aishvarya Dadheech, founder & CIO, Fident Asset Management. Sharper cuts in earnings due to rural slowdown or further rise in crude prices, can accentuate downside risk to market sentiment, he added.
Overall, India continues to be an expensive bet. The MSCI Index is trading at a one-year forward price-to-earnings multiple of 19.5 times, a premium to Asian peers, showed Bloomberg data.