Historic milestone as the market valuation of listed firms goes up

The Bombay Stock Exchange (BSE) witnessed a historic milestone as the market valuation of all listed firms soared to an unprecedented lifetime high of Rs 300 lakh crore on July 5. According to Bloomberg data, this spike, amounting to an 18.5 per cent increase since March 28, has underlined the robust performance of Indian markets.

The benchmark indices, Sensex and Nifty, demonstrated growth, surging nearly 13 per cent since March 28 and achieving a commendable 6 per cent rise year-to-date. Similarly, the BSE MidCap and SmallCap indices experienced even more substantial gains, with both indices witnessing a surge of over 23 per cent since March 28 and advancing more than 13 per cent year-to-date.

Foreign investors played a crucial role in driving this market rally, as their investments surpassed $10 billion in the June quarter. This significant inflow marks the largest quarterly buying spree by foreign investors since the December 2020 quarter, highlighting that the Indian market currently holds high attraction value.

Market participants remain closely attuned to the actions of global central banks, particularly the US Federal Reserve, seeking cues on potential shifts in their interest rate trajectory. The decisions made by these central banks are anticipated to have far-reaching implications for global market trends, including the Indian market.

As the second half of 2023 unfolds, several critical factors will shape the trajectory of the Indian market. Market participants will keenly observe the progress of the monsoon season, assessing its impact on inflation. Additionally, the outcomes of state elections and corporate financial results will be scrutinized, as they can significantly influence market sentiment and investor behaviour.

Despite the prevailing positive market sentiment, cautionary views have emerged from prominent brokerages such as Kotak Institutional Equities, Systematix Institutional Equities, and CLSA. Kotak Institutional Equities expressed bewilderment over the recent stock market rally and highlighted genuine risks to consumers, particularly in rural markets. Concerns were also raised regarding the potential impact of global disruptions on India's economy.

Systematix Institutional Equities expressed doubts about the sustainability of the current optimistic market sentiment, citing high valuations and the potential erosion of India's relative profitability. CLSA echoed these concerns, emphasizing excessive valuations, overly optimistic consensus earnings growth expectations, and the potential for the Reserve Bank of India to lag behind other emerging market central banks in terms of policy easing.

Furthermore, BNP Paribas, aligned with their market stance, expressed an underweight view on the Fast-Moving Consumer Goods (FMCG) sector and anticipated a potential correction. They foresee a moderation in revenue growth in the second half of FY24, attributing it to the diminishing pricing benefits and a shift towards volume-driven growth. The potential risk of El Nino also looms, posing a threat to the ongoing rural recovery.

As the Indian market enjoys what analysts perceive as a favourable ‘Goldilocks’ moment, defined as a scenario of falling inflation and slowing interest rate hikes, marked by strong growth expectations and significant inflows, cautionary voices stress the need for a balanced approach, taking into account various factors at play. Investors are advised to exercise discretion and consider the potential risks and opportunities presented by the evolving market conditions.

However even while market sentiments are positive, contrary to the optimistic narratives, experts say a closer look at the granular data underlying India's economic growth reveals a less-than-stellar performance. The country's private consumption remains heavily skewed, with a small number of affluent individuals driving high consumption levels at the top, while the sales of mass consumption items are experiencing a slowdown.

“This stagnation can be attributed to the significant impact of inflation and poor income growth on the vast majority of the lower-income group,” a report in the Business Standard said.

Furthermore, India's economic competitiveness continues to stagnate, as evidenced by the sluggish growth of merchandise exports. The sporadic instances of manufacturing excellence, often highlighted to create a bullish sentiment, do little to alter the fundamental reality. The stark truth is that private investment has yet to show signs of picking up. However, there are some positive developments like the push by the state in infrastructure-building, railways, and defence expenditures that are expected to yield results.