The market action in the past three days has been quite exciting. It reminded me of the market action witnessed during March-April 2020, in the wake of the outbreak of Covid-19 pandemic. Drawing from the experience of 2020, like many, at first, I was also tempted to increase my risk exposure to Indian equities. However, on second thought, I have decided to reign my temptation and avoid any deviation from the “plan”.
I note that the 2025-2026 market trajectory may not be similar to 2020-2021, for some very simple reasons.
· Ignoring the panic fall in February-March 2020 and subsequent recovery, Nifty 50 gained 12% in 2020 and another 16% in 2021. These gains occurred because corporate earnings were coming out of a 10yr growth drought. Nifty EPS has grown over 225% in the past five years (FY21-FY25), against just 50% growth witnessed in the preceding decade (FY11-FY20). The growth trajectory is now moderating and is more likely to stabilize in 11-13% CAGR range in the next couple of years.
· Presently, Nifty 50 forward consensus PE is marginally higher than the long term (10yr) average. With earnings growth moderating, there is no reason for the PE to re-rate to the higher levels. If at all, it can slightly de-rate to the long-term average. This implies that Nifty 50 returns are most likely to be in tandem with the earnings growth (11-13%), in the next couple of years, with some downside risk.
· 2024 has witnessed a record Rs5.26 trillion domestic flows into the local secondary market alone. Accounting for flows into primary markets, unlisted securities and foreign equities, domestic flows would be much higher. Expecting this kind of flow to sustain during 2025-2026 also, would be unreasonable. Given the currency weakness, higher cost of capital (bond yields) and rising uncertainties, foreign flows may not see a significant reversal from the 2024 trend, where foreign investors were marginal sellers (adjusted for buying in primary market).
· The economic growth in 1HFY25 has been much below the expectations. No major recovery is expected in 2HFY25 and 1HFY26. The actual government capex for FY25 is expected to be much lower than the budget estimates. There are reports which suggest that the capex budget for FY26BE may not see any material growth. This trend raises reasonable doubts over the sustainability of the higher than historical valuations of the sectors and companies that were expected to benefit from higher government capex. For example, infra builders, PSEs, railway equipment suppliers, etc.
· Financial sector, especially public sector banks, have contributed materially to the market buoyancy in the past four years. The rally in these banks was led by recapitalization, NPA resolution/recovery (asset quality improvement), margin expansion and high credit growth. None of these factors may be contributing in the next two years. Asset quality and margins have mostly peaked, and credit growth is moderating.
· Last but not the last, one of the keenly watched indicators - the Market cap to GDP ratio – is at an all time high. With nominal growth trajectory settling at single digit level, and IPO activity remaining strong, the risk of market cap of the existing listed stocks correcting cannot be ignored.
