Market verdict: Bull run to continue in new Samvat

Despite the record run in the past year and challenges concerning the earnings growth, Indian equities look poised for another year of double-digit gains in Samvat 2074.

According to experts, Indian equities are in a mid-cycle of sorts — where valuations are not cheap, but stocks have not quite hit a bubble territory. There is likely to be volatility going ahead, though, as the markets digest the impact of the government’s goods and services tax implementation on trade and supply chain.

“The next quarter may be challenging, but the economy will hopefully start getting back on track from the first quarter of next year. We expect the Nifty to rise about 10 per cent in the next one year, in line with the earnings growth. However, a meaningful acceleration in earnings growth will only happen in 2019,” said Andrew Holland, chief executive officer (CEO), Avendus Capital Alternate Strategies.

“The government’s reforms measures will start to take effect in the course of the year, and corporate earnings growth is likely to see a revival. We expect returns of 15-20 per cent in the year,” said Nirmal Jain, chairman, IIFL.

Mutual fund investors have come in droves in the past few months, putting in more than ~5,000 crore per month by way of systematic investment plans. The influx of this domestic money is likely to continue into Samvat 2074 as well, driving markets higher.

“Markets will give 15-18 per cent returns in Samvat 2074. Some sectors will do even better. Domestic institutions are dominating, which is a healthy trend from a long-term perspective,” added Vikas Khemani, president & CEO, Edelweiss Securities.

Market players see strong domestic flows insulating the market from sharp corrections. “Over the years, retail investors have matured and have understood that volatility is a given in equity markets. Hence, even when the foreign investors exited, there was hardly any cooling-off from domestic investors. In fact, domestic investors have provided a major counterbalance to foreign investors,” said S Naren, executive director & chief investment officer, ICICI Prudential AMC.

The flow of overseas money might be a bit more uncertain. The US Federal Reserve’s decision to put the brakes on its quantitative easing programme may somewhat cut the supply of easy money flowing into risky assets. “Globally, it’s all about what will burst the liquidity bubble. Inflation in the US and Europe has inched up. The bond markets seem complacent about the Fed tightening at the moment, and it remains to be seen if that will change in the coming months,” said Holland.

Earnings growth will, however, be the biggest trigger for the market, going ahead. Indeed, rich valuations, the lack of earnings visibility in the near term, and the moderation in macros may prevent a significant surge for the market in the near term.

“We believe that the capex cycle improvement and capacity utilisation will take some time to come around. In this mid-cycle, investors are recommended to invest in dynamic asset allocation or large-cap schemes. Given the steep rally witnessed of late, it is imperative that investors consider moderating their return expectations,” said Naren.

The upmove in Indian equities has been supported by strong macroeconomic factors such as gross domestic product growth, reducing current account deficit, and benign inflation. However, there has been some deterioration on these counts in recent times. Inflation concerns have resurfaced as well.

Since valuations in certain pockets of the market remain a concern, experts believe that investors should prefer stocks with earnings visibility, structural positive triggers, and reasonable valuations. Sectors such as information technology, pharma, upstream oil operators, corporate banks, and power public-sector undertakings are attractive at current valuations, said Naren.