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The Nifty 50’s upward jaunt from 7,500 to 18,000 within a space of two years has been cut short by a cocktail of challenges ranging from frantic central bank moves, to the war in Ukraine. However, while it lasted, the upsurge since the early lows of the pandemic was one of the most resurgent stock market recoveries in decades, according to a Mint analysis in a new series of how India Inc. has recovered from lockdowns.

The past two decades have seen several periods of excruciating market losses. However, only on two occasions have the markets seen such an impressive recovery. One was after the global financial crisis in 2008 and the other after the unexpected defeat of the ruling coalition in 2004. In the next six best instances, India’s share market gained 58% on average over the following two years, compared with the 127% two-year jump since late March 2020.

Much like the post-2008 recovery, the post-lockdown surge was largely because of the liquidity created by central banks. However, the world is a much more uncertain place today, said Vineet Bagri, managing partner, TrustPlutus Wealth (India) Pvt. Ltd. For one, this time, inflation has taken root and has got central bankers worried. Also, there was no disruption in supply chains during the 2008 crisis as there has been this time, he said. The rebound in stocks is fizzling out now amid negative global cues as the US Federal Reserve turns hawkish and sparks an outflow of foreign money. The rising uncertainty is keeping investors on the edge, with 12.2 trillion of investors’ money wiped out in May itself.

Reversing the rally

In March 2020, as the pandemic took centre stage, most stocks had succumbed to the market swoon. More than a third saw a steeper fall than the Nifty 50, tanking up to 30%, according to data on 830 National Stock Exchange-listed firms with market capitalization more than 1,000 crore.

However, excess liquidity ejected by central banks sent stocks into a relentless rally, with Nifty 50 zooming 95% in a year. The rally was a broad-based one, with large-caps, mid-caps, and small-caps all joining the party.

The extent of the markets’ retreat from now on hinges on the US Federal Reserve’s handling of the delicately placed US economy. “The Fed had to do three things to normalize the monetary environment: stop easing, raise rates, and reduce liquidity," said Bagri. With the first two steps now under way, the Fed’s greatest challenge is to unwind its balance sheet, effectively reducing liquidity in the system, he said.

Lofty valuations

However, the stupendous recovery had unintended consequences as well: expensive valuations. The price-to-earnings (P-E) ratios of close to 60% of the companies in the sample, whose historical data was available, were at a premium to their long-term averages, according to Mint calculations. Such pricey valuations have made most scrips in segments such as consumer durables, agriculture, and information technology trade above their sector’s five-year median P-E.

“On valuations in consumer durables and IT, with homes turning into offices and everything going digital, investing in these spaces became a logical step to take," said Siddarth Bhamre, head of research, Religare Broking. However, with recent corrections, this space is no more uber expensive, he said. Less than half the stocks in banking and financial services space and media and entertainment are trading at a premium.

Party poopers

The Ukraine crisis and raging inflation have been a killjoy for the marathon run. India VIX, the fear gauge, touched a 52-week high of 33.9 in February and has been volatile since then. The headline index is down 13% from its one-year peak, with 89% of the stocks trading below 13% of their 52-week highs.

Party poopers 
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Party poopers 

Tightening monetary policy and ebbing liquidity are forcing foreign investors to reduce exposure in equities. Domestic investors have been absorbing the selling to a large extent. A major part of foreign portfolio investor selling is behind us, but short- to medium-term volatility may continue, Bhamre said, citing external factors. However, growth prospects and earnings outlook will emerge stronger when the dust of geopolitical issues settle, he said.

(This is the first of a three-part series about corporate India’s recovery from the pandemic and the path ahead. The series will cover stock markets, corporate financials, and balance sheet strength.)

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