As of November 2023, the India equity markets experienced a significant surge, with benchmark indices like Nifty and S&P BSE Sensex ending the month approximately 5% higher than in October 2023.
Mid-cap and small-cap indices notably outperformed the large-cap benchmarks during this period. Several key factors contributed to this surge, including the consensus belief that the US Federal Reserve rate had peaked, a diminishing probability of a US recession, a decline in oil prices, a temporary ceasefire between Israel and Hamas, Moody’s revision of the US sovereign rating outlook to negative from stable, and resilient domestic growth.
Various sector indices witnessed substantial month-on-month spikes, with notable outperformers including oil and gas, healthcare, power, auto, capital goods, and metals sectors. Foreign Portfolio Investors (FPIs) bought equities worth US$ 1.1 billion in November 2023, contrasting with net equity sales worth US$ 3.0 billion in October 2023. Cumulatively, FPIs purchased equities worth US$ 16 billion in 8MFY24.
On the domestic front, Domestic Institutional Investors (DIIs) bought net equity worth US$ 3.4 billion in October 2023, and they have cumulatively purchased equity worth US$ 9.0 billion in 7MFY24. Similarly, flows to Mutual Funds (MF) increased to Rs 27,000 crore in October 2023 compared to Rs 24,000 crore a month earlier. Cumulatively, MF flows in equity-oriented schemes in 7MFY24 stood at Rs 1,12,000 crore.
In terms of Q2FY24 results, earnings of various sectors such as Public Sector Undertaking (PSU) banks, oil and gas, auto, pharma, and capital goods exceeded expectations. However, earnings of private banks, Non-Banking Financial Companies (NBFCs), metals, cement, consumer staples, durables, Information Technology (IT), and chemicals were in line or lower than expected. As of November 30, 2023, Nifty 50 traded at 18.7 times FY25E price to earnings multiple. Market cap-to-GDP stood at 102% (based on CY24 GDP estimates), with a notable gap between 10-year government securities (G-Secs) yield and 1-year-Forward Nifty 50 earnings yield.
Although current valuation multiples are slightly elevated compared to historical averages, experts advise considering these valuations in the context of robust nominal GDP growth, a positive corporate earnings outlook, and healthy corporate and banking balance sheets. The significant rally in small-cap and mid-cap indices has led to them trading at a substantial premium to their long-term average valuation, while large-cap valuations remain at a modest premium.
Analysts maintain a positive outlook on equities over the medium to long term, citing factors such as structurally robust domestic growth, healthy corporate profitability, and pro-growth policies. However, they highlight potential near-term risks such as a sharp slowdown in global growth, geopolitical tensions escalation, and re-acceleration of inflation globally or locally.
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