Is the Current Bull Run in Indian Stocks Justified?

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For a sufficiently long-time, stock markets always go up. Obviously, along the way, many companies may fail, and many new leaders may emerge, but the way broad market indices are designed, their natural arc is upwards. This is especially true for a fast-growing economy like India, which is still in its early phase of modern time economic evolution. Therefore, when we talk about the bull run, it also needs to be associated with a certain time frame - a Bull run over a year, five years, ten years, or even longer.
 
The long-term bull run, which we may consider as 10 years or more, is driven by evolution in factors of production which results in the advancement of the country on the global economic ladder. While India is still a lower middle-income country with an average per capita income of US$1935 in 2020, its marching path has been crystal clear to both insiders and outsiders. It’s probably the only country in the world as of today which can not only offer a large domestic market but also democratic institutions, young human capital, consistent government policies to open the economy, a steady pace of reforms, and a spectacular rise in entrepreneurship.

The last six years have been the golden age for domestic entrepreneurs and it’s just the beginning. It’s no wonder that India now boasts of the world’s third largest start-up ecosystem after the USA and China, with more than 100 unicorns, and has witnessed a staggering 15,400% growth in the number of startups in the last six years. It’s a foregone conclusion that by the end of this decade, India will emerge as the third largest economy in the world. Therefore, for global asset managers and serious long-term investors, India is arguable the best possible growth investment and it is most likely to witness a structural multi-decade bull run.
 
Now, let’s shorten the time frame. In short term, stock markets are driven by liquidity and in the medium-term stock markets are driven by earning expectations and whether real earnings match these expectations or not. After, the COVID pandemic, central banks around the world injected massive liquidity into the system by cutting rates and printing money. The governments doled out subsidies and freebies, and in many cases rightly so, to help their citizens through the pandemic. The immediate outcome was a massive bull run in the stock markets and now we are facing another consequence of that in terms of increased inflation. Therefore, the central banks are now increasing interest rates and reducing their balance sheet size to counter inflation.
 
From the perspective of India, the market movement in the short term depends upon the tango of its central bank, RBI, with the US Fed, which impacts the net inflows by foreign investors in India. Starting from October 2021, when the expectation of rate hikes by the US Fed began to take shape, to July 2022, foreign portfolio investors were massive net sellers for nine straight months, selling close to US$ 33 billion worth of Indian stocks. During this period Nifty declined by about 15%. After nine months, in July 2022, the foreign portfolio investors came back to pump US$3 billion causing a mini bull run of about 12%.

The Indian central bank, RBI, has done quite well in controlling inflation. Inflation in India is hovering around 7% which is lower than the developed economies of the US (~8.5%), UK (~8.8%), and Germany (~7.5%). RBI has increased policy rates by 140 bps in response to Fed’s increase in interest rate by 225 bps, but where it has done immensely better is in reducing liquidity by more than 10% where the Fed has barely started on this front of quantitative tightening. RBI’s policy actions have acted as a stabilizer till now but any meaningful reduction in the balance sheet by Fed is likely to cause significant selling pressure on stock markets. This is the short-term liquidity challenge which can also be an opportunity for medium-term and long-term investors.
 
In the medium term, the earning growth of Indian companies is expected to continue growing at double-digit rates. The estimated growth rate is 14% in both FY-23 and FY-24. The P/E ratio of Nifty is around 20-21 which is still extremely reasonable and much below its upper range of 25-26. The Indian economy is recovering well, and the private CAPEX cycle is expected to show massive growth in the second half of FY-2023. The private projects under implementation have demonstrated a growth of more than 9% indicating a sustainable revival.
 
So, in a nutshell, we see India as a multidecade bull story, notwithstanding the short-term challenges, which may crop up due to the liquidity game played by central banks. In fact, we look to leverage the policy overshooting and decline in stock prices as an opportunity.

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  • Sridhar N Rao @Sridhar N Rao
    S&P had fallen 17% from its high while Nifty has fallen only 5.5% as of Aug’22. Indian market has proven to be more resilient. May be it did not really overly high and hence did not fall overly low. My estimate for the end of the year is Nifty at 17500-18000.
    Like 0
  • Aswini Sathiyamurthi @Aswini Sathiyamurthi
    so indian market will not fall like US...it will be one side market...one buy on dips till World ends...right
    Like 4

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