Nifty shines at 25,000: Your big questions, answered

The Nifty 50 closed above the historic 25,000-point mark for the first time on Thursday. The jump from 24,000 to 25,000 came in just 24 sessions, making it the third-fastest 1,000-point gain for the benchmark index. This was also the only one of the five 5,000-point milestones that came within the span of a year (the 20,000 mark was first achieved in September 2023).

The rally on Thursday was due in large part to a surge in shares of HDFC Bank, Reliance Industries, Power Grid Corporation of India and Coal India, with the oil & gas, consumable fuels, financial services, and power sectors leading the charge. Information technology and automobile stocks lagged behind.

There is a strong belief that the momentum will continue, but many investors also have lingering concerns that this is a bubble, and want to know what they should keep an eye on.

Mint spoke with experts to address some key questions.

Q. How long has it taken the Nifty 50 to hit major milestones?

The Nifty 50's journey from birth to a behemoth that represents the Indian economy is a story of acceleration. While it took 17 years to gain the first 5,000 points, the index has since transformed from a marathon runner into a sprinter. 

It went from 5,000 to 10,000 in nine years, and from 10,000 to 15,000 in just three. The acceleration continued, with the index going from 15,000 to 20,000 in two years. The journey from 20,000 to 25,000 took a mere 10 months.

This rapid progress underscores the robust underlying growth and highlights a significant increase in investor confidence and market momentum. This year, India's indices have been among the top performers globally, and the volatility index has eased in recent months. Over the past six months, among key global indices, India's benchmark Nifty 50 has delivered the second highest return at 14.5%, following Taiwan's Taiex, which achieved a 25.4% return.

Q. What has driven this rally?

What has kept the momentum going during this period is strong flows from domestic institutional investors even when foreign flows have been erratic. However, even foreign flows have now turned positive for two consecutive months after experiencing outflows in April and May. If this exuberance endures, Indian markets could sustain their robust rally.

Thursday's rally above 25,000 points was aided by strong global factors overnight. US Federal Reserve chairperson Jerome Powell offered a strong hint that interest rates were likely to be cut at September’s monetary policy meeting.

“This, along with the tech sector rebounding, gave the India market the impetus to finally breach and stay above 25,000,” said Andrew Holland, CEO of Avendus Capital Public Markets Alternate Strategies LLP.

He added that liquidity is also playing a part as mutual funds are starting to deploy their cash, and investors are giving up hope of a market correction and putting their money to work.

Q. Which sectors are hot and not, and will sectoral churn continue?

The top-performing sectors in 2024 are auto and realty, with impressive year-to-date returns of 42.3% and 37.3%, respectively. These are followed by energy and infrastructure, which have delivered strong returns of 34.3% and 30.5% so far this year. 

Two defensive segments, healthcare and pharma, have demonstrated equally impressive performance, with nearly 30% returns. Next in line are consumption and metal, which have brought returns of 23.5% and 20%, respectively, reflecting positive consumer sentiment. Media has been the only laggard, with a year-to-date decline of 11.7%.

Segments such as solar or anything remotely resembling defence appear tremendously overvalued. Shankar Sharma, founder GQuant Investech, said, “I have been focused on identifying opportunities with reasonable multiples and more immediate earnings rather than earnings which will happen several years out, which is the case with many defence and solar companies."

Churn is important to sectors such as small-cap retail, technology and communications, he added. While asset managers often suggest staying 100% invested all the time, it is important to not keep your entire investment in the same securities and stocks on which you have already made significant gains, he explained.

Q. Could this be a bubble that's about to pop?

“From a valuations perspective, even though we aren't cheap, there is no asset bubble and no need to panic,” said A Balasubramanian, MD & CEO, Aditya Birla Sun Life AMC.

The market is a reflection of the growing health of the economy, and participation is rising with a higher element of earnings support even as more companies are becoming increasingly cost-efficient. Balasubramanian explained that stable macroeconomic factors combined with low interest rates and steady inflation have enabled earnings growth.

Q. What are the next potential triggers for the market?

Markets have shown strong momentum, driven by specific labels and themes, which raises the question: what should investors watch out for going forward? Aashish P Somaiyaa, CEO of WhiteOak Capital Asset Management, expects sectors and market cap preferences to rotate on relative value and will focus on picking stocks based on fundamentals rather than any sector or theme.

“Outside of this, key triggers to watch will be US's economic performance, policy response and geopolitics,” he said. “If there is a discernible sign of the US slowing and Fed cutting rates we may see tailwinds for FPI flows into emerging markets, including India."

Q. What then? Should I book profits from here?

Now that the market has rallied about 27% over the past year, Nilesh Shah, MD, Kotak Mahindra Asset Management Co, believes it's time to take some money off the table if you're overweight on equities.

“So, from overweight, you get to neutral weight,” he said. The market is neither too expensive nor too cheap – it is at fair value. India is trading at a premium to most other markets thanks to robust earnings growth, corporate governance and our focus on clean energy, he added.

He said investors could consider putting some of their booked profits into gold and fixed-income instruments. For SIP investors the performance shows that one should continue with asset allocation, he said, adding, “Over the past five years, 65 of the Nifty 100 stocks have given between 100-500% total returns."

Q. What could put the brakes on this rally?

Over the past year, Indian equities have seen robust gains amid a Goldilocks scenario and expectations of policy continuity. This strong run-up has led to high valuations.

“Going forward, one can expect bouts of consolidation, given that the macro triggers – the elections and budget – have already passed and focus will shift to earnings delivery,” said Ashish Gupta, chief investment officer, Axis Mutual Fund.

After three years of more than 20% earnings growth, a slowdown is visible in Q1FY25 and growth is likely to be less than 15% this year, he said. Equity supply has also picked up, with stake sales by promoters, private equity, and large pipeline of IPOs. “These are the likely triggers in addition to the outcome of US presidential election and global geopolitics,” Gupta added.