Fresh highs: India in elite company
US, UK and Germany among companions in benchmark indices’ climb of new peaks
The domestic equity markets are in an elite company. In May, the Indian markets joined select developed markets (DMS) — such as the US, the UK, and Germany — to record new all-time highs. Among emerging markets (EMS), Brazil also logged new highs this month. Asian peers, such as South Korea and Taiwan, and New Zealand are currently 2 per cent- 10 per cent below their previous highs made earlier this year.
The domestic markets were among the worst-performing major global markets in April amid a lethal second-wave of Covid-19 infections. But they bounced back sharply in May amid the decline in the infection rate and optimism surrounding a sharp recovery in the economy, as well as corporate earnings.
“The confluence of factors, such as bending of the Covid-19 curve and easing of the US hyperinflation phobia in recent weeks, has helped bridge the underperformance of Indian equities. The benchmark Nifty is at an all-time high. The year-to-date gain of 11 per cent is similar to that seen in advanced economies,” said Dhananjay Sinha, head-strategist & economist, JM Financial.
The benchmark indices of the
US, the UK and Germany are up between 12 per cent and 13 per cent on a year-to-date basis.
“We anticipate the remaining gap to close further with a Nifty target of 17,500 in the next 12-18 months (15 per cent upside from now). While the outperformance in 2020 elevated India to expensive valuations akin to those of DMS, it is still not out of sync with recent historical averages,” said Sinha.
Experts say overseas investors have shifted focus back to India as the spread of covid-19 has hit other Asian countries, which were unscathed last year.
“India has done well because we got more inflows. A lot of Asian markets saw outflows that could be partly to do with chip shortages in Taiwan and South Korea. Taiwan, too, had a severe lockdown. Cases have dropped in India rapidly. India is seen as a growth market. Moreover, the retail participation in India is also boosting the markets,” said Andrew Holland, CEO, Avendus Capital Alternate Strategies.
Global brokerages — such as UBS and Morgan Stanley — have said India remains their most preferred market in the EM space. “The earnings momentum has been quite resilient and the policy momentum is quite focused towards improving infrastructure and attractiveness in the global supply chain,” said Daniel Blake, Asia and emerging markets strategist, Morgan Stanley. The brokerage expects India’s earnings growth to see a huge jump in 2022, which will bring down the priceto-earnings multiples.
However, the surge in the markets has also made many sceptical as it has come at a time when the economic activity is on the decline due to the measures taken by various state governments to curtail the second wave. This has prompted economists and analysts to scale back growth projections for the ongoing financial year.
“India’s real growth would take a knock of 3 per cent in the first quarter, implying 100 basis points downside to FY22E growth at 9 per cent…there is a high probability of earning downgrades even for FY22E and FY23; we believe there will be little impact on the markets at the aggregate level as stronger companies will keep getting valued higher,” added Sinha.