On corporate fundamentals, India is anchored by a strong combination of macro stability and improving corporate profitability. Key macro data points like electricity generation, bank credit, GST collections and steel consumption continue to point towards a healthy business cycle. Our reading point towards a recovery in the rural sector. Consumption has been the weak link in the macro composition. The consumer confidence index is currently hovering in the neutral territory, compared to it being negative over the last few years. This points to a gradual improvement in consumption demand.
Earnings for Nifty companies are expected to grow at a CAGR of about 18% between FY23-26, pointing to a robust growth outlook. As against this positivity, one needs to consider the vitiated global geopolitical environment and the general low-growth environment prevailing in major economies.
As such, valuations are the weakest link in the equation. At the current level of valuations, corporate earnings need to surprise us in the positive direction to provide comfort, which, in the near term, is questionable. A cushion for valuations can come in the form of a moderation in bond yields. The 10-year bond yield, which was approximately 7.5% at the peak of the current cycle, is at a level marginally below 7%.
Sentiment is a contrarian factor. If the sentiment among market participants is robust, that’s a trigger for investors to be cautious. And if the sentiment is pessimistic, that’s when they would want to be more bullish. Current data from the ‘equity sentiment indicator’ shows that investor sentiment is very bullish. This warrants caution in the near term. While there’s optimism over Indian corporates’ growth prospects and their potential to deliver on earnings in the long term, current expensive valuations and elevated sentiments mean that one needs to be cautious in the near future.
(The writer is head of equity, SBI MF)
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