In July, the Indian stock market benchmark Nifty 50 has been breaking records, fueled by optimism surrounding the growth-oriented Union Budget 2024 and expectations of strong earnings from India Inc. for the June quarter (QFY25).
A pro-growth Budget and better-than-expected earnings of Nifty 50 companies will boost the market, making it touch unprecedented heights. The steady progress of the monsoon and the signals from the US Fed that rate cuts may start in September are additional factors that bode well for the markets.
However, risks loom.
The biggest risk is that the market has fairly discounted most of these variables and lacks fresh triggers. Disappointment on any of these fronts will be enough to trigger a correction as the market does not have any valuation comfort. Experts say even an in-line Budget and Q1 earnings may not be able to sustain the market valuation.
The Nifty 50 is overheated. According to Bloomberg data, its current price-to-earnings (P/E) ratio is 24.9, significantly above its forward 12-month PE ratio of 17.8.
Another key valuation metric, the price-to-book (P/B) ratio, is currently at 4 against a one-year forward PB of 3.19.
The benchmark Nifty 50 is up by 13 per cent year-to-date (YTD). The medium to long-term prospects of the market remain bright, but in the short term, experts advise to stay cautious.
Mint spoke to five experts to gather their insights on the near-term market outlook, their views on potential consolidation after the Budget, and advice for investors. Here's what they shared:
We think there's a good chance the market will continue to rally, but this depends on some key factors.
Mainly, it will hinge on the fiscal deficit numbers and how the government plans to fund its projects.
Clarity on taxes will also play a crucial role. If these elements are favourable, the market mood will likely stay positive.
However, we might also see some profit-taking at higher levels, where investors sell off their stocks to lock in gains.
Investors can handle this uncertainty by keeping more cash on hand.
Stocks have become quite expensive over the last two years, so waiting for better buying opportunities might be a good idea.
Holding cash allows investors to take advantage of market dips or corrections.
It's also important to focus on fundamentally strong stocks and avoid chasing overpriced ones.
This cautious approach can help navigate unpredictable market conditions effectively.
The market's reaction post-Budget will hinge on the measures announced.
Expectations are high, and if the key demands are met, the positive trend can continue; otherwise, consolidation may occur.
We are well-positioned to expect favourable measures from the government, supported by the RBI dividend and steady inflows from FDI and tax collections.
However, for the market to expand further, the Budget narrative must be robust, focusing on industry growth, reformist measures, and fiscal prudence.
Given India's current high valuations, the potential for upward momentum is limited in the medium term. It is prudent to focus on specific stocks and sectors.
It is advisable to rotate out of the outperformers of the past two to three years to ensure safety and achieve above-market returns.
Generally, we can anticipate that the rule of average will improve in the coming year.
The improvements in rural areas, agriculture, and government expenditure are anticipated to benefit sectors connected to the domestic economy, such as staples, FMCG, fertilisers, telecom, cement, pharma, infra, and consumer services.
Consequently, transitioning from growth to value stocks on a medium-term basis is recommended.
We expect the Union Budget in July to provide a combination of (1) higher capex targets, (2) higher allocation to the rural and agricultural sectors and (3) further fiscal consolidation—without shifting away from the existing prudent fiscal policy framework.
The market is also expecting more or less the same as we are expecting. If the government meets these expectations, it will likely drive the market. Without this, we may see a period of consolidation within a broad trading range.
Given the potential for volatility to increase ahead of the Budget event, we recommend consolidating equity portfolios at current levels or when the market moves higher.
For new investors, we advise a gradual investment approach, buying on price declines and avoiding heavy investment at current levels due to the expensive market valuations.
Currently, markets are expected to consolidate, with crucial support for Nifty seen around the 23,800-24,000 zone, whereas resistance is seen around the 24,800-25,000 zone.
Investors must be cautious, given that markets are trading at record levels.
They should stagger their investments across sectors and not concentrate on any specific stock or sector alone.
India’s long-term growth story remains positive. Hence, the best time to invest is always there.
However, given the historical learnings, it's best to adopt a SIP model, diversifying into five to six sectors and adding a large, mid or small cap or a mix of all, depending upon the risk appetite.
In a bull market, small-caps tend to outperform all other categories, but they also fall the hardest during bear markets.
Hence, a trade-off between risk and reward is a must to sleep peacefully at night.
There is no point in speculating much about the Budget's impact. Eventually, it does not matter if we talk about markets broadly; they tend to follow the path of earnings trajectory.
Though the Budget's outcome may have some impact for a couple of days, the markets will turn their focus back to fundamentals and earnings, so that is how we are looking at the Budget right now.
Regarding the broader picture, we are witnessing SIP flows of around $2 billion a month. With growing retail participation, continued FII flows, and solid projections for the Indian economy, this bull run is here to stay for Indian equity markets.
This decade belongs to India; we may see Indian markets scaling new highs.
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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.
