India’s equity market: Bull run cheers investors; what’s the long-term view?

The domestic equity market has been witnessing a bullish phase, with the main indices trading at record highs. On July 7, the Sensex closed at 65,280.45, and Nifty at 19,331.80.

The robust performance can be attributed to various factors, say market experts. Increased FII (foreign institutional investor) inflow into the Indian market is widely seen as the key reason. 

According to Tanvi Kanchan, Head – Corporate Strategy, Anand Rathi Shares and Stock Brokers, in 2023 so far, FIIs have put more money into the Indian market than they have pulled out. “FIIs have been net buyers for the current financial year, with the total inflow crossing the $10 billion mark, after outflows in the last two years,” she told The Federal. 

 Gaurav Dua, Head – Capital Market Strategy, Sharekhan by BNP Paribas, said: “Most leading equity markets have been doing quite well for the past few months. It started with the US banking crisis, which led to central banks in the US and Europe moving away from quantitative tightening.” Central banks use quantitative tightening as a tool to decrease the amount of liquidity or money supply in the economy.

This was followed by the opening of the liquidity tap again, leading to more money being flushed into the economy. “This led to a rally in the emerging markets in general, and in Indian equities in particular,” Dua told The Federal.

The rally was also triggered by positive macroeconomic data, an increase in mutual fund inflows, and the capex cycle gaining steam, experts point out. 

What’s in the offing

Market experts that The Federal spoke to believe the market will continue with its bull run for the next few months. The economy is going strong, taking the markets along with it, said Dua. Along with increased spending on infrastructure, the country’s economy would get a boost from the real estate upcycle and the start of the corporate investment cycle, he added. 

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Empirical data show that the equity market tends to do well in the year ahead of the general elections, and this could again boost the markets this year, he observed.

Shrikant Chouhan, Head – Equity Research, Kotak Securities, believes the long-term perspective for the equity market is good, but says there would be corrections/dips in the short term. 

The Nifty-50 index is likely to gain almost 7 per cent in the next 12 months and hit a high of 20,700 by June 2024, largely owing to strong corporate earnings, analysts at Goldman Sachs were quoted by Reuters as saying.  

Kanchan of Anand Rathi thinks the Indian market will continue to attract FIIs.  “Contrary to popular perception, the current valuation for Indian equities is generally below average for the last five years, and only marginally higher than the last 20-year or 15-year averages. In my assessment, while Indian equities may not be extremely cheap currently, the market is not very expensive either, making it a good prospect for FIIs,” she said. 

According to her, risks to the equity market’s performance going forward include considerable geopolitical uncertainties, a slowdown in global growth, tightening of interest rates, and the effect of El Nino.

Positive outlook

Overall, analysts believe that the medium to long-term perspective of the country’s equity market is positive, with healthy growth prospects.

“We believe that the Indian equity market is heading higher mainly owing to positive domestic macros and weakness in the other emerging markets, which are instrumental in inviting foreign inflows,” said Chouhan of Kotak Securities. “Broadly, we are expecting the market to remain between 19,000 and 20,000 in the medium term. BFSI, auto and pharma stocks should do well. Threats include rising bond yields and the dollar index in the US.  Our strategy should be to buy on dips with a medium-term view.” 

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Dua of Sharekhan by BNP Paribas agrees with that view. “Though there are concerns related to valuations not being cheap anymore, along with events like the state elections, weak monsoon and moderating consumer sentiments, we continue to believe that the Indian equity market would do well over the medium-to-long term, on the back of a multi-year economic upcycle ahead,” he said.

“Though it is difficult to predict short-term market movements, it would not be surprising if there is a pullback of 3-5 per cent after such a strong rally. However, this would be an opportunity for investors with a 1-5 years investment horizon to accumulate quality companies,” he added.