• Pradeep Gupta believes that a potential earnings disappointment is a bigger risk for Indian markets than huge valuations.
Pradeep Gupta, co-founder and vice-chairman, Anand Rathi Group, says unless the US faces a prolonged and deep recession, we do not expect a major adverse and prolonged impact on the Indian equity market. In an interview with Mintzini, Gupta explains why he believes India is a long-term story. Edited excerpts:
Q. What is your view on the current market structure? Are you worried about the rich valuation?
Till recently, the global as well as the Indian equity market, remained in a corrective mode for over a year from mid-October 2021.
Meanwhile, the earnings of listed companies in India have increased significantly. As a result, valuations of a large chunk of Indian equities looked attractive before the recent rally began.
Currently, while the Indian equity market has both upside and downside risks, the market is likely to remain strongly volatile in any particular direction over the next three to six months.
Compared to the average of the last five years, the valuation multiples of the Indian equity market in terms of Price to Earnings (PE) ratio currently look reasonable if not attractive.
However, the multiple looks slightly higher than the average of the last 20 years. In any case, we do not see a huge jump in terms of valuations of the Indian equity market.
At this point in time, I think a potential earnings disappointment is a bigger risk for the Indian markets than huge valuations.
Q. In your view, what makes India an attractive market for the long term? What are the macroeconomic positives and what challenges do you see?
In the long term, the equity market is mainly driven by three factors.
These include both macroeconomic and corporate fundamentals, liquidity flows towards equity markets, both domestic and overseas, and valuations.
India has made tremendous progress in terms of macroeconomic fundamentals during the last 25 years. India's global ranking has improved from 16th to 5th in terms of size of the economy.
India's global rank has improved significantly over the past two and a half decades, in terms of output for all sectors and sectors of the Indian economy, including agriculture, industry, services, private consumption and fixed investment.
According to the International Monetary Fund forecast, India is likely to be the fastest growing major economy in the world for all the years from 2022 to 2027.
Therefore, India remains very attractive in terms of macroeconomic fundamentals.
Corporate fundamentals, especially over the last few years, have outperformed macroeconomic fundamentals.
So this is also another area where the Indian market becomes very attractive from a global perspective.
The share of equity investments by Indian households in total savings has been rising steadily since 2000.
Over the past five years, a major chunk of investment in equity has been coming through systematic investment plans in units of mutual funds.
Therefore, domestic money flow towards the equity market is a major strength of India. India also attracts 2-3 per cent of global cross-border portfolio equity flows.
Since 2000, India experienced net cross-border portfolio equity investment outflows in only three years, 2008, 2011 and 2018. The current year is also likely to be an outflow year.
Nevertheless, as per past experiences, whenever there is an outflow of portfolio investment from India, India will receive a sizeable amount of portfolio equity inflow over the next few years. From that point of view also India looks attractive.
I have already talked about valuation of Indian equity market. I think Indian equities are close to fair value.
Therefore, on all three accounts that are fundamentals, liquidity and valuations, the Indian equity market remains attractive from a long-term perspective.
The macroeconomic positives for India at this point of time include the best GDP growth rate among major economies with a systemically important domestic investment cycle, strong credit growth offset by falling inflation, significant achievement of government revenue and lower than budgeted expenditure.
Negatives for the economy include poor performance of exports versus imports and slow growth of deposits in the poor performance of the manufacturing sector.
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