BUBBLE OR BULL MARKET....ELECTION & MARKET

 Are we in a bubble or is it real growth for the stock market? This one of the biggest questions in the minds of the investors and every player in the market is this bubble for the NIFTY & Sensex. We are in a Bull market of course, but have not reached a Bubble phase yet.  The Nifty has scaled up from 17,277.65 as of 31st March 2023 to 19800 levels as of 8th September 2023 and this has raised our eyebrows when the global economy is facing headwinds, particularly in China and the U.S.  More importantly, the current rally of the market might continue since this time election is very much linked with the stock market behavior hence more focus on higher levels.

 Nifty is up by ~12% FY24 YTD and ~7% CY23 YTD – this does not clearly look like a ferocious bull market return by any measure. By the same measure, the Midcap 100 index has rallied by ~26% FY24 YTD and ~20% CY23 YTD. Hence, it is well clear that markets are not in a bubble but in the bull market phase.

 Let’s get quickly into some numbers where we get an idea about the macroeconomic strength and its impact on the Indian stock market which is getting reflected now we find that:

• Manufacturing Capacity Utilization at 76.3% in Q4FY23
• NSE-500 Debt to Equity falls from 1.4x in FY18 to 1.1x in FY23
• Banking sector NNPA declines from 5.9% in FY 18 to 1% in FY 23
•  Capex expectations on NSE 500 much higher in core sectors vs. FY 18 (Oil & gas, Metals, Power, Auto, Telecom, Cement): Ref next slide
• Non-food credit growth at a robust ~20% YoY in Jul-23
• New project announcements in the manufacturing sector increased by 1.6x in 4 years.

Capex Cycle of India

If we look at the capex cycle we find that the state’s government’s quality of spending has improved as seen through higher state capital spending vis-à-vis revenue expenditure. Current Capex is at Rs2.79tn in Q1FY24, posting a 59% YoY FYTD growth. The monthly run rate of Rs928bn so far exceeds the run rate of the last four years. Further in FY 24, the present central government has adopted two more measures to support state spending.

In the context of the global map, we find that India’s real GDP growth projections for both FY24 and FY25 are double the global growth projections (3% for both years). They are also higher than all AEs, EMs, and Developing Economies (July 2023, IMF). The ratings of India have been revised upside down by many global rating agencies and brokerage houses.

If we look at the inflation we find that climate-related issues have created immense pressure on household budgets rising from food inflation. Further, as crude prices have elevated back to $90 the commodity prices might go up but thanks to the Chinese economic slowdown it will not create a major havoc for inflation. The fiscal condition of India is much stabilized as compared to the previous couple of years. The GST, indirect and direct tax collection, and import/export all are in a much better position keeping a strong check on the fiscal imbalances.

Role of Election in the Market

We are just a few months away from the Indian election of 2024 which is going to be an immense event not for India but for the global economy.  The Indian stock market plays a pivotal role in the election and this time the impact of the new segment of investors who are joining the market will be the key decision-makers. Today there are about 100mn+ stock market investors which are about four times larger than five years ago. Further, there are over 500 mn+ + social media users and first-time voters of about 130mn. The stock market and higher levels of the stock market will keep and play a major role in the election.

Flows into the Market

The size of inflow into the equity market has grown significantly from DII’s:

• PMS saw AUMs rise at 12% CAGR over 10-yrs, and now at 27% of MF
• SIP collections in ~7yrs is USD 100bn a CAGR of 45%
•  SIP inflows translate to 2x Net Equity MF inflows (average of last 12 months, & in July 23)
• Nifty-50 Consolidated  EPS for FY24 & FY25 stand at Rs 990 & Rs 1128, with growth at ~20% & ~14%, translating to PE at 19.7x & 17.3x 
• The below data of cash holding is for 10 AMc out of 44 AMC hence the cumulative number of the rest will be more in terms of cash holding.

Midcaps Time Yet to Come

The Midcap 100 index has rallied by ~26% FY24 YTD and ~20% CY23 YTD. The earnings of this segment are about to grow significantly and we are getting ready to see new earnings upcycle for mid/small caps. The prime reason backing the new upcycle in earning demand is from rural India bottoming out, decline in input costs, elevated rates but a status quo, and India benefits from the shifts in supply chains. Further, as the election comes near we will find many government sops and incentives and price reduction policies creating more liquidity for consumption. Any tweak in GST in specific sectors will bring more growth for the economy and market. On the other hand, what keeps the Indian markets on their toes is the gradual rise in global crude – up by ~25% between Jul - Aug. The implied price for India’s crude basket for Aug’23 is around USD 86-87 per bbl. But we have many sources of supply hence the price escalation may not be worrisome keeping the election in mind since the govt may absorb much of it in case of higher prices

Election is what makes us skeptical.

The upside of the market looks capped as the current valuations discount the optimistic projections. More importantly, we have 5 state elections before the Lok Sabha Elections between late 2023 to early 2024- Mizoram, Telangana, Rajasthan, Madhya Pradesh, and Chattishgarh. Furthermore, Uttar Pradesh and Maharashtra are likely to be crucial to the election outcome as these two states are the largest contributors to the Lower House, with 128 seats and nearly a quarter of the chamber's 543 elected representatives. Since 1984, there have been two instances (out of 10) when the market was down on an absolute and relative basis six months and three months before the election (1998 and 2009). Further the new alliances I.N.D.I.A is going to give challenge and fight to the current government and this is where we are skeptical.

 Investors Role:

Follow your asset allocation and risk profiling. Re-check your goals and risk levels so that you get a clear idea about investments. Rebalancing of portfolio and where the investor is skeptical for risk-taking ones should get into defensive sectors to avoid any nightmare.  Passive investing –investing in the Index should be done through the STP route. Investments should be linked with goals and not out of emotions derived from the short-term rally of markets. Invest in a staggered way and use liquid and STP routes to invest in MF, PMS, or AIF (where a staggered payment option is available). Adopt advisor services where required since every subject needs a specialist to guide despite having free guidebooks available in the market. Your investment should be linked with a vision for 2030 of India. We are not in a bubble we are in a bull phase backed by strong macro support and a domestic investor-driven market. You will enter points either through a price correction as well as through a time correction for investing. The current business cycle is still in the negative zone with depressed earnings making valuations optically expensive but it is not a bubble since the hard part of interest rates and higher commodity prices just like CY-2022 is over.