The jury is still out on whether global markets will be convulsed similarly amid rising concern over a possible recession in the Western economies beset by inflationary pressure and an extended period of tension due to the war between Russia and Ukraine. Still, it will be prudent to trade cautiously even when the current bull run looks alluring to seasoned and novice investors alike. That leads us to the theme of this year’s ET 500 edition — how to ride a bull run without getting trampled. The key will be not losing sight of the basics of fundamental investing while hunting for opportunities in a market that may look overvalued if earnings growth fails to keep pace with rising stock prices.
Markets and economy
It’s not hard these days to notice contrasting vibes in the stock market. Over the past few weeks, the benchmark Nifty 50 and S&P BSE Sensex hit a new high periodically amid unabating fund flow from domestic investors — retail and institutional — and selective flow from foreign portfolio investors (FPIs). Yet, annual returns of these indices are in single digits at around 6-7% compared with the double-digit returns of 14-27% in each of the previous three years. A cursory look suggests that these are still more than decent returns compared with the fall, aka negative returns, registered by a majority of the global indices. But they do not reflect the lacklustre performance of the small-cap and mid-cap stocks, each of the respective indices earning 1-2% returns. In the previous year’s ET 500 edition, we had anticipated that it would be tough to earn double-digit returns this year due to higher market volatility. The benchmark indices had indeed lost over 12% in the middle of June 2022 from the beginning of the year, giving the current bull run the shape of a pullback rally.
Moreover, while the economy has shown resilience amid rising inflation, weakening currency and volatile energy prices, the Reserve Bank of India (RBI), at its latest policy meeting on December 7, cut the FY23 GDP growth forecast by 20 basis points to 6.8%. The latest report of the Organisation for Economic Cooperation and Development (OECD) expects India’s GDP growth to decelerate to 5.7% in FY24 amid moderating export and domestic demand before recovering to 6.9% in FY25 under the assumption that inflation will moderate by then. While domestic retail inflation has started to cool off, at around 5.9% in November, it still remains above the RBI’s target of 4% (with a tolerance band of 2 percentage points on either side of that). The GDP projections portray a possibility of slower demand growth in the coming quarters, in turn implying a period of lower earnings growth for companies. Such a scenario will continue to make stock valuations rich, thereby raising concerns about the sustainability and the extent of the market rally.
IPO brouhaha
In the previous year’s edition, we mentioned the lure of IPOs while debunking the common belief that they usually earn manyfold returns by stating that more than half of those of 2021 failed to retain listing gains or even extended listing losses. Our latest take on IPOs reveals that 56% of the companies in our sample that launched an IPO in 2021 have not been able to retain listing gains. The proportion of such companies for 2022 is higher at 60%. While equities do offer an opportunity to earn better returns than most other asset classes and IPOs are a great way to start building exposure to relatively new businesses with strong potential, investors need to be cautious. It is advisable to avoid IPOs that are aggressively priced compared with listed peers unless the difference in financial performance is large enough to justify the elevated valuation.
The road ahead
Investors need to bear in mind that the extent of the resilience of the Indian economy in the backdrop of a stressed global scenario often referred to as the decoupling factor, will be tested more often from hereon. For instance, the recent data on India’s international trade is worrying. The merchandise trade deficit widened to $26.7 billion in October and exports dropped by 16.7% to around $30 billion. While it narrowed in November to $ 23.9 billion, it was largely due to lower imports as exports continued to remain weak. The merchandise trade deficit in the eight months to November was estimated at $198.3 billion compared with $115.3 billion in the year-ago period.
Experts draw attention to the rising sensitivity of India’s exports to global trade. ANZ Research economist Dhiraj Nim, writing in ET recently, attributed it to India’s increased participation in key global trade segments, including engineering and electronics goods. In addition, IT exports have remained elastic to global economic growth. Nim concluded that risks to growth from an export recession seem to be larger this time around.
Against this backdrop, the latest ET 500 issue makes an attempt to provide actionable information to investors, whether it’s a feature on companies that gained market share in the Covid aftermath or those taking advantage of increasing manufacturing opportunities. Another feature lists top SIP schemes, keeping in mind the rising clout of retail investors. All of this will hopefully guide you on how best to ride the bull while watching out for the hooves.
