The Indian market has successfully conquered a new zone, with the Nifty50 crossing the 25,000 mark, which is now expected to act as a strong support level. Last month, the index had slipped to 24,400 following the US’s unexpected imposition of a 50% tariff on India. However, it is steadily recovering as the market believes that such elevated tariffs would not be sustainable over the medium term. This resurgence was attributed to several factors, like the expectation of limited impact on the domestic economy and the Indian government’s proactive strategic balancing act to reaffirm its geopolitical importance to the US.
The announcement of significant GST reforms completely cancelled the short-term negative effect on the overall economy, thus causing the market to bounce from the monthly low. Further support came from renewed trade discussions between the US and India, which helped propel the Nifty50 past the 25,000 mark this week. Going forward, this range is expected to establish itself as the new baseline for the domestic market. For Nifty50, 25,050 to 25,150 is likely to be a strong support, while on the upper side, 25,600 to 25,700 could be the resistance. The market is looking forward to a plausible mini deal between both economies as soon as next month to take it forward accordingly.
What will drive Indian stock markets higher?
For the market to advance further, apart from the finalisation of the mini deal, two key factors need to play out positively. Firstly, the earnings growth of India should move higher from the current run rate of 10% YoY. India’s broad corporate growth was about 10-11% in the last two quarters, with a QoQ improvement visible, in which mid and small caps did better than large caps. Nifty50 earnings growth was about 7-8% YoY. This has given traction to the broad market; however, to sustain higher earnings, growth has to move higher towards 15%. Well, a similar growth of about 10% is expected in Q2, which will not help the market in the short-to-medium term due to the high premium valuation gap. To sustain the current 20.5x one-year forward price earnings ratio, we need to do much better.
However, on the positive side, the recent bounce is also attributed to the anticipation of better earnings growth from Q3 onwards, in the December quarter. This is highly possible, led by the tax cut in April and the GST cut from Sept onwards. Rising disposable incomes from tax savings, easing inflation, and a resilient domestic economy are fuelling consumption, while lower product prices are further stimulating demand. Cut in prices of products is driving demand. This is very positive for consumption-based (staples to auto) companies powering future volume and margin growth. These sectors are available at long-term average valuation levels attractive for investors.
Secondly, the inflow from FIIs has to improve from sellers to net buyers. FIIs sold about $15.3bn YTD in India. They are a seller in the secondary market while a buyer in the domestic primary market.
Even as FIIs sold Indian stocks, they have been buyers in other Asian markets like China, Taiwan and Japan. They have been highly active in developed regions like America and Europe, with the strengthening of the dollar.
Some key factors behind FII selloff in India are heavy premium valuation, like MSCI-India trading at a 100% premium to MSCI-EM one year back, and a downgrade in earnings growth from the second half of 2024 onwards. Secondly, India has lost the AI and semiconductor-based developments, which were captured in America, China and Taiwan.
That said, market sentiment is turning more constructive. Expectations of stronger earnings growth from December onwards, along with a narrowing premium valuation gap between India and EMs (from 100% to about 60%), are reducing the case for underperformance.
More importantly, the Fed’s rate cut in September, with two more expected this year, is likely to weaken the dollar and channel fresh inflows into emerging markets, positioning India as a beneficiary.
(The author is Head of Research, Geojit Investments.)
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