India outperformed its global counterparts due to robust domestic economic conditions, according to a Tata Mutual Fund report.
India is also emerging as a sweet spot in the global supply chain, amid the chaos created by the Russia-Ukraine war and Covid. Going forward, there are two possible scenarios, including a shallow recession in developed markets, which could be a blessing for India as crude and commodity prices may come down, the report says.
According to the report, in case developed markets enter a deep recession, the risk of a liquidity event and risk-off environment will impact Indian markets too, and challenge the valuation premiums.
Factors Fuelling India’s Growth
The pick-up in the investment cycle, credit cycle and real estate are a few of the long-term factors driving high earnings in India. Moreover, tailwinds for the Indian manufacturing sector and the industrial sector are driving India’s growth.
In case of a soft landing, commodity prices like crude and food will come down, which will drive the growth even higher.
Balanced Portfolio Strategy To Capture Economic Cycle
Investors should seek high growth at reasonable prices in company stocks. To create a balanced portfolio, investors can increase their exposure in mid- and small-caps to bank on a broad-based economic recovery.
At the same time, using the bottom-up investing approach, i.e., investing in individual stocks by analysing the fundamental factors of a company’s stock, would prove effective during the rising interest rate scenario.
Create Balanced Portfolio To Bank On Pockets Of Strong Earnings Recovery
Recovery in the investment cycle led by healthy cash flows in the corporate sector and the government’s counter-cyclical fiscal policy is fuelling the growth of the industrial and the goods sector.
High credit growth, margin expansion and lower non-performing assets (NPAs) can drive the banking stocks higher. This also implies strong earnings momentum for the sector. Mid- and small-sized banks are trading at early cycle valuations, the report says.
Profitability Trends
India has outperformed given the expectation of strong earnings momentum this quarter.
The risk of corporate earnings downgrade has reduced materially with the potential of slight upgrades opening up. The banks and capital goods are leading the positive earnings upgrade cycle.
Softening of commodity prices and margin support in IT services is incrementally positive. Even in sectors with high risk like IT and FMCG, margins are expected to be supported by either lower input costs or easing wage pressures, the report adds. That said, the biggest risk to the market comes from the behaviour of global commodities. A rise in crude prices could lead to a reduction in India’s valuation premium.
Market Performance
Global equity markets have witnessed a strong rally over the past month. The expectation of softening of the rate hike trajectory and peak terminal rate likely to reach in by June 23, the report says.
Also, soft landing in terms of growth will likely be followed by revival helped by lower inflationary pressures, rate cut, and softening of strict zero Covid-19 policy in China.
While Nifty is up by 10 per cent in one year, Nasdaq is down by 26 per cent.
Also, banks in India have outperformed all other sectors, as Nifty PSU Bank is up by 56 per cent, while the second best performer, Nifty Metal is up by 26 per cent, which is less than half of the prior’s gains. Nifty IT has been the worst performer, as it is down by 13 per cent in one year.
