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Wishing everyone Happy Diwali and a Prosperous Samvat 2081

Indian Markets created history in Samvat 2080 by hitting milestone after milestone. The Nifty surpassed 26250 and BSE Sensex surpassed 85900 in September 2024, with both Indexes gaining around 25% during Samvat 2080. The BSE Midcap and Smallcap Index outperformed and gained 45% and 50% respectively. The up move in markets was exceptional considering the spread of Covid19 and subsequent lockdowns. The up move in markets was exceptional considering geopolitical tensions, global weakness and global elevated interest rates. All class of investors drove the up move. While the FPIs set forth their conviction in Indian capital market by infusing Rs *** cr in equities YTD, the retail category wasn’t behind with monthly SIP crossing Rs 23000 cr in September 2024. Samvat 2080 belonged to Autos (+60%), Metals (+43%), Oil & Gas (+60%), Realty (+72%), Pharma (+55%), Capital Goods (+50%) and Power (+85%)

Global Economy is stabilizing

Easing of inflation and evidence of the resilience of global commerce make us cautiously optimistic on the global economy. There is solid degree of confidence that the US has turned a corner on inflation with a 50bps cut with potential two more cuts coming this year and 100bps in 2025. In Europe, recession fears remain, but markets are gaining confidence that central banks, particularly the European Central Bank (ECB), have more room to maneuver following the Fed’s recent 50-basis-point rate cut. The European Central Bank (ECB) has cut interest rates for four times this year. Asian economies look good driven by the People’s Bank of China cutting its 14-day repo rate and reverse repo rates, cutting reserve requirement ratio (RRR) by 50bps, lowering mortgage rates for existing loans and increase its debt. Even Bank of Japan indicated that the bank is not rushing to hike rates. Monetary policy is thus turning a corner with an expected return to loosening in the majority of countries and regions.

We are cautiously optimistic on India

India’s macroeconomic position continues to be quite strong, with (1) a strong growth and BoP (currency) outlook and (2) a moderate, but improving fiscal and inflation (interest rates) outlook. Q1FY25 results and management commentary highlighted modest improvement in the laggard sectors of IT services and consumer staples. We expect continued improvement in the affordability equation for low-income households, driven by a combination of (1) a period of relatively stable product prices, after 4-5 years of relentless price increases and (2) a modest increase in household incomes. Until September 27, cumulative rainfall was 7% above long-term average indicating normal monsoon. CPI inflation in August picked up marginally to 3.7% on higher-than-expected food prices. We retain our call for a shallow rate cut cycle, starting in the December policy. GST collections, IIP numbers, trade figures, fiscal deficit, strength of INR and other indicators continue to remain strong. Crude prices are benign at USD 75/barrel. We expect real GDP growth rate of 6.9% in FY25E and 6.5% in FY26E factoring in (1) continued government capex (2) improvement in global situation and (3) gradual improvement in consumption.

Outlook and Valuation

Domestic inflows and non-institutional sentiment are unlikely to be affected by the rally in the Chinse market. India’s domestic non-institutional investors will likely continue with their price-insensitive bidding/buying approach, as long as (1) they have strong conviction about high returns from the market or (2) as long as trailing returns look good. Institutional investors (MFs) have no option but to deploy the funds coming into domestic mutual funds, irrespective of valuation and/or conviction levels. Valuations are largely redundant in such a market. Post-decent 19.8% earnings growth in FY24, we expect net profits of the Nifty-50 Index to grow by 6.7% (EPS of 1042) in FY25 and by 17.3% (EPS of 1222) in FY26. At 24700, Nifty trades at 23.7x FY25E and at 20.2x FY26E. FY25 will likely see more broad-based growth across sectors. However, the OMCs will likely drag down overall profits, as we expect their profits to normalize in FY25. We find most sectors and stocks quite overvalued with the degree of overvaluation ranging from (1) low for most large-cap consumer, IT services and pharmaceuticals to (2) medium in the investment space to (3) high in the case of several low-quality companies. As the broader market valuations are rich, opportunities arising from market correction can be used to add quality stocks (with attractive valuation) from long-term investment perspective. Based on our assessment of markets, sectors and stocks, we have identified eight potential stock ideas that are expected to do well in Samvat 2081. Happy Investing!