Soaring Markets Suggest Pre-Budget Rally
The year 2017 gave handsome returns to the investors, who flooded the markets with funds through MFs/SIPs. Relentless movement in the mid-cap and small-cap stocks led to the rise in the markets. However, the recent reduction in the exposure of mutual funds to these segments amid overvaluation started off cyclical correction, with SEBI disallowing swapping of stocks within the categories.
Not only the mid-cap and small-cap stocks, but the frontline stocks witnessing flashes of bounce on intra-day basis are taking the benchmark indices to new highs. While the broader markets had all their fingers in the pie, the frontline stocks too have had their sunny days and there is still some steam left in them. The broader markets are likely to bounce back yet again, post profit-booking at the peaks. The year 2018 is set for new a growth chapter, specifically in the frontline stocks, led by the revival in corporate earnings and economic boom leading to renewed interest from the domestic and foreign investors.
The companies have adapted to the reformatory changes and are set to reap fruits of the new tax and economic regime. Moreover, the clean-up of the banking system, where the RBI has stepped in to force the banks to recognise bad loans since 2015 through asset quality review, would usher in transparency and help gain confidence of the investors in the Indian businesses. However, the country needs some more time to root out NPAs completely. Thereby, investors can look for stocks with lower D/E ratio than their peers, or at least those companies where promoters have brought in equity in line with the debt.
Lately, the Indian stock markets are being driven by stock-specific or sectoral up-moves, led by the corporate earnings or news. The Q3 performance of IT is in line with expectations and the robust earnings from banking frontliners have kept the markets going, even in the overbought zone. Further, optimistic numbers from FMCG giant HUL have cued revival in consumer demand. To add to it, the periodic announcements by the government are ensuring sustenance in the markets.
Considering the macroeconomic numbers, the core sector data, PMI and IIP numbers surely indicate a recovery in the Indian economy. Yet, the CPI inflation hitting its multi-month high of 5.21% amid higher vegetable and oil prices puts a spanner in the RBI’s monetary easing plan in the near term. However, the easing of WPI to 3.58% amid lower primary food prices suggests some relaxation in CPI going forward. But the rising NPAs in the midst of a growing economy is expected to put the markets in a quandary over the long term. For now, the soaring markets can be viewed as a pre-budget rally.
Yet, the Indian markets are less overvalued as compared to global bourses, considering the periodic brakes slammed in by government's reforms. Further, though markets are trailing at premium valuations, the multiples are still lower than the psychological/historical peak levels from where the markets are expected to correct. Hence, we can expect the markets to consolidate, which will be followed by a gradual upsurge. Benchmark indices may follow the correction of broader markets, as indicated by the market cycles, Still, investors who have been waiting for discounted valuations would enter and support the markets