This CIO Will Not Call the Market Overvalued Despite a 20% Rally in 2023 and Suggests Concentrating on These 4 Sectors

 This CIO Will Not Call the Market Overvalued Despite a 20% Rally in 2023 and Suggests Concentrating on These 4 Sectors

This CIO Will Not Call the Market Overvalued Despite a 20% Rally in 2023 and Suggests Concentrating on These 4 Sectors

The potential of overheating is the short-term concern for the Indian market. It's time for investors to control their emotions and thoroughly weigh their risk vs return options.

Since the March 2023 low, the Indian equities markets have grown steadily; the Nifty 50 TRI (total return index) has increased by 20%, while the TRI indexes for Nifty mid-cap and small-cap companies have increased by 47% and 55%, respectively. are growing from, in absolute terms. All three of the market's indexes have reached fresh highs today.

The range of involvement from the area was an intriguing aspect of the event. Numerous industries are reaching unprecedented heights, including capital markets, real estate, pharma, life and general insurance, capital goods, auto, and non-banking financing enterprises. Markets are a key economic indicator. Thus, a rise in the involvement of different economic sectors in the stock markets most often indicates the beginning of a new economic cycle. It meets the criteria for being a robust market and is unlikely to implode very soon given the aforementioned quality of market participation.

Furthermore, domestic investors and flows into the markets drive our markets. Furthermore, "An object will not change its motion unless a force acts on it," according to Newton's first law. Negative news is thus now required to halt this advance in order to reverse or stop the market momentum.

The market now believes there is a greater chance that the present political system will last into 2024, in light of the outcomes of the most recent assembly election.

The market anticipates that India will continue to be among the top economies in the world with the quickest rate of growth since this development must guarantee the continuation of policies that encourage growth.

Strong economic development, political stability, and India's potential mid-2024 membership in international bond indexes might all contribute to the Indian Rupee's appreciation and more foreign direct investment (FDI) inflows into the country, which would drive up the markets even further.

The $4 trillion Indian economy is becoming a growth engine in a globe that is suffering from slow development. Investors are encouraged by India's growth's long-term predictability and certainty. The appeal of Indian stocks as a market is rising.

After gradually increasing since late 2021, global interest rates have already peaked. Even while interest rates could stay high for a while, it is anticipated that central bankers won't increase them much further since inflation data is predicted to stay low and economic data from developed markets is already beginning to deteriorate. indicating using signs.

As investors, we see a strong association between the yield on US 2-year bonds and the Indian markets (interest rates are inversely correlated with the price-earnings ratio, meaning that an increase in interest rates results in a decrease in P/E and vice versa). Thus, the narrative around the US interest rate peak has fueled our markets, particularly the Santa Rally in the equities market.

Regardless of the result of the 2024 election, the auto, finance, FMCG, and capital goods sectors might do well in this broad-based rally. The following justifies these areas:-

Automobiles: They account for 35% of manufacturing GDP and 6% of India's GDP. By 2030, the market for electric vehicles (EVs) is predicted to have grown to 10 million units annually at a compound annual growth rate (CAGR) of 49% between 2022 and 2030.

Financial: Through market penetration and digitization, this industry has a lot of room to develop. The area will benefit from the rising number of internet-savvy young people and the sizable rural market as fintech develops.

FMCG: Demand has remained steady during the worldwide epidemic, demonstrating the sector's stability and resilience. Rising customer expectations are anticipated to fuel the all-weather-friendly sector's continued growth.

Capital goods: This category covers subsectors that will profit from the government's greater infrastructure incentives and programs like PLI (Production Linked Incentive), such as electrical equipment, plant equipment, earthmoving/mining machines, heavy power equipment, etc.

We now have to examine the hazards associated with this market. The market is focused on many dangers, including overvaluation, increasing oil prices as a result of supply interruptions brought on by conflict, a dramatic downturn in global economic activity headed by the US, uncertainty surrounding the Indian election, a slowdown in government investment in India, and inadequate rural reforms. As.

The 10-year average of Nifty values is still being observed. Therefore, even while there is potential for over-exuberance in mid-cap and small-cap prices, we wouldn't characterize the market as overpriced.

We think that the most important danger to be on the lookout for is the possibility of a US hard landing, although it seems like this will take some time. In the near future, there is a chance that the Indian market would overheat. It's critical for investors to control their emotions and to carefully weigh the risks and potential returns.