Mint Explainer: Did Indian stock market celebrate prematurely?

The bottom line: expect the unexpected on Dalal Street in 2022. Photo: Reuters  
The bottom line: expect the unexpected on Dalal Street in 2022. Photo: Reuters  


  • It’s too early to celebrate the easing of inflation pressures in the developed world, says the Indian finance ministry

It takes a brave man to call the stock markets in these turbulent times.

Sample this. A Reuters poll of 30 equity strategists in mid-May forecast the BSE Sensex to recoup less than half of its losses and close 2022 at around 56,000. Here’s what happened. From its year’s low of 51,360 in June, the market surged 16% and crossed 60,000 on Wednesday before the correction on Friday.

The bottom line: expect the unexpected on Dalal Street in 2022. Volatility will be endemic as the market attempts to make sense of an uncertain global macroeconomic environment. For investors, it may well be a roller coaster.

Why have the Indian stock markets surged?

It was a pulsating July for the Indian stock market, with the Sensex and the Nifty spurting 9%. In August, the market has risen 2.6% so far. This bounce is a result of a complex interplay of factors.

Optimism that most of the bad news had already been factored in and the worst is behind us fuelled the rally. Despite the blip on Friday, the Indian market closed with gains for the fifth week on the trot.

With the US slipping into a technical recession, many traders believe the US Federal Reserve may go easy on rate hikes now. The Fed has twice raised rates by 75 basis points–in June and July– to put a lid on inflation, which is at a 40-year high.

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In India, the finance ministry, in its monthly review on Friday, asserted the country is better placed on the growth-inflation-external balance triangle for 2022-23 than it was a couple of months ago. Many experts concur.

And then came the return of the foreign investors. After selling Indian equities for nine months, FPIs became net buyers again. In July, they bought almost $600 million worth of Indian stocks net of selling amid a softening dollar index and healthy corporate earnings.

Foreign investors appeared to be taking a bet on India’s growth story, with the country expected to grow at about 7% in fiscal 2023, possibly making it the fastest-growing major economy in the world again. Many FPIs appeared to be bargain hunting, picking up blue chips at attractive valuations. Foreign investors though sold on Thursday even as the dollar index rose.

All these factors appear to be feeding into Indian stock prices.

Is the worst over for Indian stock markets?

For the moment, the outlook appears brighter for Indian stocks. Retail inflation ebbed in July, with both food and non-food inflation moderating globally, including crude. And while central banks mull further tightening to tamp down inflation, the market is hoping the interest-rate cycle may be about to peak, certainly in India, if not in the advanced economies.

For the moment, the outlook appears brighter for Indian stocks.
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For the moment, the outlook appears brighter for Indian stocks.

The Indian government, too, appears upbeat on the outlook for inflation in India. In its Monthly Economic Report for July, the finance ministry says: “In the absence of any further shocks to global commodity prices, particularly crude oil, India’s inflation rate may well have peaked already for this cycle, thanks to RBI’s monetary tightening and the government’s policy measures."

But challenges remain, and the market will have some anxious moments over the next few months. If central banks in the developed economies, particularly the Fed, persist with rate hikes to bring inflation into their comfort zone, it will rattle the Indian stock market too. There will be FPI outflows, as seen in recent months, and there will be worries that a sharp slowdown in the developed world will weigh on the Indian economy as well–a weakening rupee will stoke inflation, and exports will take a body blow.

The Indian government concedes that the global financial markets “have begun celebrating, perhaps, prematurely, the easing of inflation pressures in the near-term in the developed world." The finance ministry flags the “tense and fraught" geopolitical environment, commodity supply bottlenecks and the cloud over the Chinese economy.

India is negatively correlated with other emerging markets

Still, both global and local investors are more bullish on the Indian growth story than other emerging markets. India was the best-performing market in the MSCI Asia ex Japan index in July and also outperformed most other emerging markets across the world. China, in particular, remains a spot of concern for global investors, with its economy growing at its slowest rate since early 2020, at 0.4% in Q2. Also, the problems in the Chinese property market only appear to have aggravated even as new covid lockdown measures were imposed in several cities.

Interestingly, as Mint reported a few days ago, the MSCI India index is now negatively correlated with the broader MSCI Emerging Markets (EM) index for 20 months, the longest period since it was created in 1993.

Between 1 January 2021 to 12 August 2022, MSCI India rose 18.5%, while MSCI EM shed 21%. In 2021, the MSCI India index rose 26.66%, while MSCI EM fell 2.22%. So far this year, till 12 August, MSCI India has fallen only 5.07%, while MSCI EM has tumbled 7.5%.

China, South Korea and Taiwan comprise almost half of MSCI EM.

What are the options for retail investors?

The Sensex is now trading at 23 times trailing EPS and 21 times forward EPS (FY23)–at these levels, the market is historically fairly valued, analysts say. According to some analysts, a market correction will be an opportunity to accumulate quality stocks. On technical charts, too, the market appears overbought. Momentum indicator relative strength index (RSI), which indicates a stock is overbought or oversold, appears to be giving a warning signal. The Nifty RSI, at over 80, is well over the overbought zone of 70. The RBI measures the speed and price change of stocks and the broader market.

Remember, short-term trading comes with high risk at this point, given the expected volatility in stocks in the near term, say experts. Take a mid-to-long term view of the market, and if you must trade, keep tight stop losses.

In fact, many more Indians now seem to view stocks as family silver and are investing regularly in the market with an eye on the long term through systematic investment plans or SIPs. There are over 50 million mutual fund SIP accounts in India now. Assets under management of SIP schemes have been growing at about 30% every year. Remember, equities outperform all asset classes over the long term, particularly in developing economies. The Sensex has spurted 20 times in the last 20 years or so–from 3,000 to about 60,000 now.

Ace investor Rakesh Jhunjhunwala himself–while a deft trader as well–always kept an eye on the long-term and had predicted Nifty will hit 100,000 by 2030.

Elsewhere in Mint

In Opinion, Manu Joseph argues whyscience is disappointing in comparison to its own reputation. Ashish Dhawan tells why Indian philanthropy is nowpoised to take off. Anirudh Suri writes what America’sInflation Reduction Act means for India. In Long Story, aneconomist girlfriend explains why stock prices have rallied again.


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