Market Revival: Is the Rally Sustainable?

The market has quickly rebounded from its recent downturn, with the BSE market capitalisation surging by ₹16.6 lakh crore since the lows of the last fortnight. Factors that had been causing concern are now subsiding. There is also growing optimism around the possibility of interest rate cuts by the US Federal Reserve. Expectations for a so-called soft landing have also brightened up after the recent benign macro-economic data. And even though the geopolitical tension is still at an elevated level, it is not as bad as it appeared last fortnight.

The key question on many investors’ minds now is: how sustainable is this rally and can we fall due to domestic reasons or any other reason? To address this, we need to revisit the basics and examine the market valuations, which are crucial for determining long-term performance. Currently, Nifty 50, the benchmark for the equity market, is trading at 20.3 times its one-year forward earnings, according to Bloomberg consensus estimates. Following the recent correction, the index is fairly valued, sitting within its 10-year forward average multiple of 20.4x.

India has long been considered relatively expensive compared to the other emerging markets. This consistent premium valuation is supported by factors such as robust corporate earnings growth, a stable political environment, and GDP growth that surpasses most major global economies. Nifty PAT has compounded by 25 per cent over the last three years. Additionally, the current government’s third consecutive term ensures policy continuity and reform momentum, further bolstering investor confidence.

Various domestic and international agencies estimate that GDP growth could range between 6 per cent and 7 per cent in the coming years. Supporting this outlook are favourable macroeconomic conditions – a stable currency, controlled twin deficits, peaking interest rates, moderating inflation, and significant advancements in digital and physical infrastructure — all of which justify India’s valuation premium.

Nifty 50 is currently trading near its lifetime high and despite this, there are some sectors that are trading at a discount to their historical averages. For instance, private banks and NBFCs are currently trading at 18 per cent and 5 per cent discounts, respectively, to their 10-year average forward PE ratios. Conversely, sectors like utilities and cement are trading at premiums to their historical averages, driven largely by the government’s pro-infrastructure policies since the corona virus pandemic, which have pushed these valuations into more expensive territory.

The banking sector stands out as an attractive investment opportunity, not only because its current valuations are below the long-term average but also due to its recent underperformance relative to Nifty 50. Sector rotation, a strategy that involves shifting investments into undervalued sectors poised for recovery, offers potential for alpha generation. Given the recapitalised balance-sheets of PSU banks, historically low net NPAs, and strong credit growth of 15-16 per cent, the banking sector is wellpositioned for a potential upswing.

In our cover story, we delve into how various sectors are intertwined with the broader economy and how investors can actively manage their portfolios by rotating holdings across sectors. This strategic approach aims to ensure that your investments are aligned with the right sectors at the right time, maximising the potential for returns. Further, in a special report, we have covered how defensive sectors such as FMCG, which again have underperformed Nifty 50, may perform going ahead. This needs a look especially after the market has become volatile recently.

Staying informed and strategically positioning your investments will be the key to navigating these dynamic market conditions. Stay tuned!

RAJESH V PADODE
Managing Director & Editor