Plenty of positives to keep the rally going

Indian equities have continued to stay buoyant with a one-way rally over the span of the last 18 months. The global flow of liquidity has played a major role in taking all the global indices to record highs. The Indian market has been a major beneficiary of this trend backed by a dovish monetary policy from RBI. Governments prompt policy support for battered sectors, and the announcement of PLI schemes for as many as 18 sectors have charted a clear path for the future.

Driven by the revival in the level of activities and many economic indicators reporting strong traction, India has emerged as the best performing market over the past 12 months. During this period, India has outperformed the developed as well as the emerging markets with considerable ease. It has managed to outperform the MSCI World Index and MSCI Emerging index by 15% and 29%, respectively, in the past 12 months.

A few roadblocks ahead

During this ongoing rally, India has added nearly $2.08 trillion market cap since the lows of March 2020. With this, India is now the world’s sixth-biggest stock market in terms of market capitalisation, overtaking France for the first time.

This staggering performance comes with its own perils though. Valuations appear to be extremely stretched, limited to the potential of further upside in the short to mid-term. However, it will depend on how earning shapes up in quarters to come. If the earnings revival continues to stay strong in the coming quarters, it will add more to the investors’ confidence.

Apart from the earnings, the policy stance of the US Federal Reserve will play a big part in maintaining the flow of liquidity into the Indian market. The Fed has already announced to start its rate hike cycle, and the market is expecting it to provide a framework for it in its upcoming policy meeting. The tapering process has already started with the Fed moderating its bond-buying program. Future developments on this will largely determine the market’s mood.

In the meantime, the Evergrande crisis has emerged as a potential threat. The potential default of Evergrande could have a major impact on the Chinese bond market. Considering global exposure into China’s bond market, it can well have a spillover impact on global markets. And, the world could be staring at a crisis very early into a new business cycle.

Plenty of positives

The short term outlook appears murky, with a potential global crisis lurking on the horizon with the Evergrande issue. However, India has plenty of positives to look upon from a long term perspective.

The Indian government has set a target of becoming a USD 5 trillion economy by 2026-27. Going one step further, a recent Bank of America report suggests that India is set to overtake Japan as the world’s third-largest economy by 2031.

The government has unleashed plenty of supportive policies post COVID-19 in the form of PLI schemes. It is a significant step to increase investment into developing new-age industries such as renewable energy and electric vehicles. Apart from this, the rise of unicorns and listing of new age internet and fintech companies are likely to give a huge boost to the flow of FDIs and raise India’s market capitalisation in times to come.

(The writer is CIO of TejiMandi. Views expressed are personal)