Marking a historic moment, the Nifty index surpassed the 21,000 mark for the first time, sparking debates on potential market corrections. However, several factors suggest investors need not fret excessively. As the fabric of the market undergoes a transformation, it's crucial to understand why the Nifty index's ascent may not herald an imminent downturn.
Political Stability Bolsters Confidence
One significant reason is the continuity of administration. The BJP's recent triumph in three key state assembly elections indicates political stability, reinforcing the party's stance ahead of the forthcoming general elections. Investors perceive the present government's adept handling of geopolitical difficulties and India's growth curve, alongside maintaining fiscal discipline, as a strong, confidence-inspiring signal.
India's Earnings Growth: An Underestimated Trajectory
India's earnings growth is on track and might even be undervalued. Over the past ten years, corporate profits have been hampered by the banking sector's battle with bad loans and a downtrend in investments. However, authorities like Ridham Desai from Morgan Stanley foresee a rise in India's earnings cycle. They project a hike in the proportion of profits in GDP from the current 5% to 8%, along with a nominal GDP growth of around 10-11%. This could translate into an earnings growth of 20% over four years, potentially higher if it occurs within three years.
Market Valuation: Not as High as Assumed
While the index levels can be deceptive about market value, a reverse discounted cash flow analysis reveals that the implied profit growth for many companies is attainable. A significant number of Nifty companies reflect growth rates that align with the expected GDP growth and profit share increases, suggesting that the markets might not be as overvalued as they appear.
Decadal Low of Foreign Investors: A Silver Lining
Foreign investors are currently at a decadal low. However, this can be viewed in a positive light, as markets usually revert to the mean. Following the COVID-19 induced market correction, global liquidity and monetary easing propelled the markets. However, subsequent rate hikes by central banks like the US Fed to combat inflation led to a pullback from riskier markets. This shift might offer an opportunity as circumstances stabilize and investors return, offering a unique perspective to the current market scenario.