“ALL IS WELL THAT ENDS WELL.”
Mega event of Lok Sabha Elections is behind us. As expected, BJP retained power but with the coalition support. Economy has grown at a faster pace in the last decade under the leadership of PM Modi and same will be continued for another 5 years. Markets were expecting Stability & Continuity from these elections and same were delivered to them. Even the union ministers were retained with same portfolios, with BJP retaining majority of the share.
The coalition will approve most of the economic policies & reforms. However, the partners will have a say in them and might me modified to suit them. Social reforms such as CAA & UCC may take a back seat or will be modified from what was originally planned. Moral of the story is MODI is back as PM and his ambition to make India a developed economy by 2047 remains intact.
Positives in May:
- India’s Q4 GDP Grows 7.8%, Surpasses Estimates; FY24 Growth At 8.2%.
- May 2024 GST Collections at Rs 1.73 Lakh Crore; Up 10% Year-On-Year.
- S&P upgrades outlook on India’s sovereign rating to ‘positive’.
- April CPI inflation eases to 4.83% vs 4.85% in March 2024.
- Bumper RBI dividend of Rs 2.11 trillion to give govt more fiscal room.
- BSE Market Cap Hits $5 Trillion For The 1St Time. Market Capitalization-To-GDP Ratio at All Time High of 140.2%.
June 2024 – What to look forward? In our last month’s market outlook, we had said that market performance this year is entirely dependent on below factors:
- Fed rate cuts, 2) War, 3) Elections
Fed rate cuts: GDP, PMI no’s cooling off, inflation & job data sticky, hence Fed will maintain status quo now, with probability of at least 2 rate cuts this year gaining momentum.
War: No major escalations now limited to small attacks. Talks for peace solution going on, can see some good news on this front.
Elections: With NDA Govt formed and Modi back as PM, elections are done and dusted, focus now on continuity of growth & new reforms. Budget in July end will now be a key event to watch.
Since all above factors moving in positive directions, markets are scaling up new highs. New factors to watch for the entire year now will be:
- Earnings growth
- Valuations
- DIIs Flows
- China +1
Earnings Growth: The corporate earnings for the fourth quarter of FY24 were strong, with widespread outperformance across aggregates. The earnings beat was driven by domestic cyclicals, such as Autos and Financials, along with Healthcare, Capital Goods, and Cement, while global cyclicals like Metals and Oil & Gas dragged down overall profitability.
Nifty 50 delivered a strong beat with a net profit growth of 12% year-on-year (YoY). Five Nifty companies, HDFC Bank, State Bank of India (SBI), ONGC, Tata Motors, and Coal India, contributed 72% of the incremental YoY accretion in earnings. Ex-Metals and Oil & Gas, Nifty’s earnings grew 16% YoY.
Hence better earnings have helped bringing valuations in fair zone again. Nifty is trading at a 12-month forward P/E of 19.2x, at a 6% discount to its own long-period average (LPA).
Valuations: Indian markets are not cheap in valuations at present, but they are not over valued also. With all economic & geo-political indicators in its favour, it is obvious to command certain premium over others and this will be the norm going ahead unless and until there is some shift from its existing stance. It can be political or policy-wise, both scenarios highly unlikely to happen. So, every small dip will be good opportunity to buy rather than waiting for heavy corrections.
DIIs Flows:
Above data is a clear indicator that Indian markets are now not dependent on FIIs money. Money flowing from SIP’s, Insurance Policies, NPS & Provident Funds have gradually become so big that it is enough to hold back Indexes on its own buying strength.
Indian investors shift from traditional products like FDs, Gold & Real Estate to Mutual Funds and Direct equities is fuelling this rally. This money is there for long term and not to go away quickly. Hence placing a bet against Indian markets will be suicidal now.
China +1: Post Covid, countries across the globe has identified that they cannot be dependent on China, which is now Worlds Manufacturing Hub. China’s current regime is unpredictable, autocratic and pro-conflicts. During Covid, supplies were hit high due to strict and long lockdowns by Chinese Govt. Any future attempt to annex Taiwan will make matters worse and sanctions will hit supplies badly.
Hence world needs alternative, big enough to take care of China. Vietnam, Indonesia are smaller countries not big enough to provide alternative to China. India is the only country in size & resources which can be an apt alternative to China.
Indian Govt has already identified this opportunity in its last regime and already taken action on this front. PLI scheme, corporate tax cuts, infra build up are some of the initiatives India has started. Manufacturing boom will also spur up other sectors related to it like Power, Infra, Housing, Consumption & Auto.
Hence, we can see more allocation of funds this budget in these sectors. India’s imports will decrease drastically, fiscal deficit will improve, and ratings will be upgraded. India’s domestic economy is so huge that even in case of geo-political tensions or global recession, internal demand & consumption will take care of the economy as compared to peers.
Conclusion: We have entered a heavy bull run and above factors will take markets to new high. Any dips should be bought in. Focused sectors like Defence, Power, Manufacturing, Housing, Auto & Consumption will do much better than traditional indexes.