Samvat 2078: What's In Store For Indian Stock Markets
India's markets rose to a record in Samvat 2077 amid surplus liquidity and an economic recovery following the Covid-19 pandemic's disruption. However, concerns over an uptick in inflation looms.
The new Samvat is also expected to witness significant risks including the tapering of monetary stimulus in the U.S., which may trigger outflows from global markets in the next few months.
Several fundamental changes are underway like multinational companies shifting their supply chains outside China. BloombergQuint spoke to analysts to assess the possible trajectory of the Indian markets in the new year.
Here's what they said.
Chief Executive Officer, Avendus Alternate Strategies
The markets will be 10-15% higher by this time next year but there will be corrections along the way.
There are a lot of global factors and headwinds which will impact corporate profitability and global GDP. And across India, we will suffer some of those problems as well because of higher oil prices, input prices and supply-chain issues.
At some point we'll see a 5-10% correction in global markets and possibly in India too. But over the year, I still expect it to be 10-15% higher.
The finance sector and within that insurance and asset management segments will do well.
Better performance is likely from sub-sectors the banking sector overall.
There will be a lot of infrastructure spending by the government and that will be good for all the suppliers and construction companies.
As India reopens, businesses like restaurants, tourism and travel will do well.
The risks will be more global than local. If China slows considerably, that’s going to impact global trade and earnings.
India will have its own problems with inflation. But the correction could be led by global factors, while local factors could end up hurting, too.
Managing Director And Chief Strategist, JM Financial
The markets are on the expensive side, initially driven by foreign investor participation and then by domestic liquidity.
The current price-to-book at 4.3 times on a trailing basis is 20% higher than the five-year average. The one-year forward multiple is at a 24% premium. Both are on the higher side.
India is trading 70% higher on the forward earnings multiple than the average of 25 global indices.
Investors should brace for some corrections. Nifty is expected to be in the range of 16,500 to 18,500 next year.
Inflation is one of the biggest risks as energy prices are up.
This might push central banks to start normalising more aggressively than initially thought.
The easy availability of global liquidity can be questioned as the risk-free rate starts rising. It's already rising and can continue to go up for the next three to six months. That will have an impact on domestic liquidity and the way valuations are.
Stronger dollar and earnings downgrade are other risks for the domestic markets.
Sectors that are protected from margin compression will largely do well in the next Samvat. These include information technology, banking, telecom, utilities, and manufacturing.
Within manufacturing, the consumption-driven companies that have the pricing and market power. These include durables and discretionary segments, and to some extent the FMCG space.
Co-Founder, Carnelian Capital Advisors
The next year will not be as rewarding as the last Samvat even though the economic activity is set to pick up.
The expectation of returns should be tapered off.
The pick-up in the economic activity is already factored in and some concerns of inflation might come about.
Investors should prepare for good volatility and correction.
Overall returns may not be more than 10-15%.
Apart from inflation, geopolitical issues and elections are key risks to Indian markets.
Banking, manufacturing and IT will do well in the next one year.
Investors should avoid metals and consumer discretionary because margins will be under pressure.
Founder And CEO, Marathon Trends PMS
The coming year will be of two parts. The earlier part, for the next quarter or so, will face the challenge of inflation globally. This is not because of massive increase in demand but essentially there are supply constraints.
So the risk of inflation on the markets will be higher in the first phase, say up to December. After that, it cool off and the "colour of the market will change".
A target of 16,000 on the downside and 19,000 on the upside for the Nifty 50.
The markets could consolidate and won't witness the kind of parabolic moves seen last year.
Combined with supply-chain issues and rise in commodity prices, there is a pressure of inflation.
Companies are reporting good top line growth, but the margins are getting squeezed because of higher input and transportation costs.
This inflation, however, is transitionary.
Commodity stocks, banks and financials will continue to do well.
FMCG and related sectors, wherever the impact of commodities and input costs is visible, are going to suffer in terms of margins.
They may move sideways for the next three to six months.
Supply will get back to normal efficiencies and the pressure will reduce.
There will again be a movement towards consumption-related stocks in the second half of the year.
Managing Director, Elara Securities
Nifty compound at the rate of 20% for the next three years.
Fresh allocation will go into financials in the new Samvat, given the recovery, firm trends on NPAs and outlook on credit improving. Valuations, too, are much below the pre-Covid levels.
China's problems are a positive as it will lead to higher allocations for India in the EM basket.
A threat of U.S. Federal Reserve rate is less imperative given that India has strong growth as allocation of flows and supply disruption that will impact inflation will come off.
The market has rallied on a sharp reflation in domestic earnings after Covid. If that momentum slows, the market would get challenged.
The supply risks isn't a threat unlike a demand threat. Supply will correct itself in due course whenever there is demand. Intermediate spikes on inflation should be bought into.
The tailwinds for the financials are extremely strong and these will contribute to the index movement.
Reliance Industries Ltd. continues to be under-owned on a relative basis, despite the size it has on the index.
Between financials and Reliance, the Nifty will be in a good stead.
The government is focusing on moving the value chain of specialty chemicals industry towards India, with the PLI scheme and China + 1 shift. The sector will likely consolidate till the proof of the shift is established, in terms of earnings.
There is a macro opportunity, but the companies will have to work very hard over the next three years to justify the current valuations.
Director and Senior Fund Manager at Dalal & Broacha Stock Broking
Stock markets, obviously, could see a short-term correction.
In the long run, however, history keeps repeating itself.
The economic growth is just starting and there is a longer runway for the next three-four years.
The market should do very well in the next 3-4 years. "Frankly, I would not be surprised even if it doubled from here, or at least doubled."
China growth slowdown is a risk but that will be "China specific".
Taper in the U.S. and other places around the world won't impact the stock market in India. The economy should continue to grow and because of that, the country will attract overseas investments.
Between 2003 and 2008, markets went up nearly 6.5 times. But there were at least four and five instances of markets correcting by 15%. Markets don't go up in one stretch.
There will always be corrections, breathers. But the direction is very clear. "I continue to believe that we are just half way through in the bull market."
Anything to do with consumption will do well because a strong economic growth can lead to a reasonable increase in per capita income, as seen between 2003 and 2008.
Initially, as quarterly results show, jewellery and real estate companies are doing very well.
Which means, high-ticket expenditure, and consumption, started happening.
Industrial growth will also happen. The biggest jump will come from anything related to the power sector.