Markets hover around record high but valuations still remain reasonable: Analysts

Indian equity benchmarks are hovering near record highs the Nifty 50 index rose to record high of 19,991.85 on July 20, the index has however staged a minor correction of little over 3 per cent from all-time highs. But the small decline from all-time highs has raised concerns about market valuations among investors.

The swift rally in Nifty from low of 16,945 in March to record high made in July has been a one way up move for the equity markets. The current rally in stock markets is third rally in the markets since 2021. 

The first rally in Nifty began in April 2021 and culminated in 36 per cent rise in the index followed by downfall from high of 18,477 to low of 15,294. The second rally that began in July 2022 led to 23 per cent surge in Nifty followed by declining phase till March 2023 and in the current up move Nifty has just risen 13 per cent from lows of March. However, overall, the index is still up only 4 per cent from October 2021 high of 18,477 which according to analysts provides valuation comfort near record highs.

“After remaining range-bound over the past 18 months, Indian markets finally broke the shackles and surpassed the earlier highs in July. A combination of strong macros, peaking out of inflation and interest rates, robust external balance and stable currency, stable micros and a sharp recovery in FII flows post- March has driven the ascent,” brokerage firm Motilal Oswal said.

Reasonable valuations

While markets are at all-time highs, not all such milestones are similar. Valuations today are relatively more reasonable than the October 2021 peak of the Nifty. This is largely attributed to the 18-month correction experienced by Nifty when it was range-bound even as its earnings were up 34 per cent and 11 per cent in financial year 2022 and financial year 2023.

“Meanwhile, the sentiment is upbeat now, we do not believe it is euphoric yet. The recent rally in NSE Midcap 100 index (up 19 per cent in three months) notwithstanding, the index has compounded at a modest 12 per cent over the last six years (June 2017-June 2023). Similarly, the NSE Smallcap 100 index (up 20 per cent in three months) has compounded at a measly 7 per cent over the same period. Despite the rebound from March 2023 lows, India is underperforming global markets as Nifty is up 7 per cent versus 32 per cent rally in Nasdaq, 16 per cent gain in S&P and 18 per cent gain in Germany’s DAX in US dollar terms,” the Mumbai-based brokerage said.

Returning foreign flows

Foreign flows are also returning to India after a long winter. FIIs have so far this year invested Rs 1,32,406 crore compared with record outflow of Rs 1,21,439 crore in 2022.

“FII flows bounced back strongly during March-June 2023, with cumulative inflows of $15.5 billion. Conversely, domestic institutional investors (DII) flows continued to remain positive at $4.1 billion during the same period. 

“India’s strong macroeconomic fundamentals in the context of weak global growth as well as expectations of another year of healthy corporate earnings could keep the flows resilient in our opinion, particularly given the backdrop of a weak post-Covid economic rebound in China,” Motilal Oswal said.