Stock melt-up lowers forward equity return prospects: ICICI Securities analysis

Domestic brokerage house ICICI Securities, in a recent report, said the stock market melt-up in recent months is reducing forward equity return prospects. Financial markets in August 2024 faced emerging global market risks, largely driven by fears of an impending US recession and the unwinding of the Yen carry trade. 

These factors began to curb the rally in stocks. However, US economic data painted a different picture, with the Q2 2024 GDP revised upwards by 20 basis points to 3 percent, driven by stronger consumer spending and private investments, ICICI Securities pointed out.

The report added that the US core PCE price index rose modestly by 2.6 percent in July 2024, leaving the door open for a potential interest rate cut by the US Federal Reserve in September 2024. 

In India, the 6.8 percent GDP growth of Q1 FY25 reflected slowing government spending due to elections and adverse weather conditions impacting agricultural growth.

However, the brokerage highlighted that the robust growth in gross fixed capital formation (GFCF) and private final consumption expenditure (PFCE), at 7.5 percent and 7.4 percent respectively, indicated resilient household spending on real estate and a potential pick-up in private capital expenditure.

ICICI Securities also noted that India’s consumer price index (CPI) cooled to 3.5 percent in July 2024, in line with the US inflation trends.

Price Melt-Up Impact on Forward Returns

ICICI Securities set a September 2025 target for the NIFTY50 at 26,550, based on a 20x P/E multiple. This implies only a 5 percent upside from current levels, significantly lower than the long-term expected returns of around 14 percent. 

The brokerage pointed out that mid and small-cap stocks continue to trade at their most unattractive relative valuations compared to large caps despite having higher near-term growth prospects.

Top Stock Picks

ICICI Securities recommended several stocks as top picks, including:

Banks and Financials: SBI, IndusInd Bank, AU Small Finance Bank

Industrials and Infrastructure: BHEL, Inox India, NTPC, CESC, GR Infra

Metals and Energy: JSPL, JSW Steel, Ambuja Cements, GAIL, Gujarat Gas, HPCL

Consumer and Auto: Havells, Jyothy Labs, Interglobe Aviation, M&M, Maruti

Pharma: Aurobindo, Piramal Pharma

Key Risk Factors

ICICI Securities flagged several risk factors that could impact the market. These include financial market excesses spilling into the real economy, affecting liquidity flows and trade. Additionally, supply-side concerns, like ocean freight costs, severe weather conditions, and geopolitical tensions, coupled with resilient demand-side forces like steady GDP growth, could stoke inflationary pressures, cautioned the brokerage.

Investment Outlook for Q2 FY25

ICICI Securities pointed out that investment rates likely picked up in Q2 FY25, as indicated by strong industry credit growth and the recovery in government capital expenditure. 

During Q1 FY25, government capex spending dropped sharply by 35 percent year-on-year to ₹1.8 lakh crore due to the general elections. However, in July 2024, central government capex recovered sharply, rising over 100 percent year-on-year to reach ₹802 billion. 

ICICI Securities believes that this upward trend in government spending will likely continue in the coming months as capex catches up.

Additionally, bank credit to the industry grew by 10.2 percent in July 2024, with mid and small corporates driving this growth. The real estate sector remains strong, according to media reports.

High-Frequency Economic Data Signals Robust Domestic Demand

ICICI Securities highlighted several indicators pointing to robust domestic demand in India.

The Purchasing Managers’ Index (PMI) for manufacturing and services printed at 57.5 and 60.4, respectively, for August 2024, indicating strong economic activity. GST collections also grew by 10 percent year-on-year, reaching ₹1.75 trillion for August 2024, it added.

Core sector growth in July 2024 was recorded at 6 percent year-on-year, while non-food credit growth as of August 9, 2024, stood at 13.6 percent. Housing loan growth surged 19 percent in July 2024, though personal loan growth decelerated to 14.5 percent.

India’s monsoon season saw a surplus rainfall of 8 percent overall. However, certain regions in the eastern and north-eastern parts of the country experienced a deficit of 13 percent, which could impact agricultural output in these areas, it added.

ICICI Securities’ analysis provides insights into the current market dynamics, highlighting both opportunities and risks for investors in the coming months. With the global and domestic economic landscape evolving rapidly, market participants must closely monitor these trends to navigate potential challenges and opportunities.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.