FOCUS: Renewed FPI buys, better macro outlook to push Nifty 50 higher
Informist, Thursday, Nov 30, 2023
By Neeshita Beura and Anshul Choudhary
MUMBAI – The benchmark Nifty 50 index, which crossed the psychological barrier of 20000 points on Wednesday, is likely to rise further as market participants expect foreign portfolio investors to continue buying Indian equities despite the expensive valuations. While participants are certain the index will set new highs in the near to medium term, they are unwilling to set a target given that the calendar year is drawing to a close and the general election is due next year.
The 5% rise in the Nifty 50 in November was driven by a confluence of macroeconomic and technical factors, according to analysts. International crude oil prices cooled, US Treasury yields came down as inflation in the US eased, and fear of the US Federal Reserve raising interest rates further receded. US inflation rose 3.2% in October, slower than the 3.7% rise recorded in September.
The fall in US Treasury yields has made Indian equities attractive once again for foreign investors. Geopolitical concerns have also eased after the truce, temporary as yet, in the war between Israel and Hamas. Besides, the recent earnings season has boosted confidence in the economy and the prospects of the corporate sector.
The comments by the Fed after its policy meeting earlier this month were perceived as less hawkish than expected, prompting several market participants to believe that the US central bank is done with raising interest rates. The impact of this was visible immediately: the widely tracked Dow Jones Industrial Average rose over 7% in November. This also boded well for the Indian market.
"If US inflation continues to decline, FPIs will continue buying Indian equities," said Vijayakumar, chief investment strategist at Geojit Financial Services.
The yield on the 10-year benchmark US Treasury bond, which had risen to nearly 5% in October, has since fallen and was at 4.3% on Tuesday, reflecting the perception that the Fed's rate hikes may be over.
The rise in the Nifty 50 in November came after FPIs resumed buying Indian stocks. They had been net sellers in the previous two months, offloading Indian stocks and buying US bonds to benefit from the higher yields. A rising dollar, the likelihood of a slowdown in global growth, and heightened geopolitical tensions triggered the flight to safer assets from emerging markets.
FPIs, which sold shares worth $2.37 bln in September and $2.66 bln in October, resumed buying Indian equities in November. As of Tuesday, they had bought equities worth $614.19 mln. "We see Nifty (50) sustaining the uptrend, with the index moving towards 21000-21500 by March," said Hitesh Jain, strategist, institutional equities research, at YES Securities (India) Ltd. The fall in Indian inflation has enhanced investors’ risk appetite, according to analysts.
In addition to easing US bond yields, lower inflation in India, and robust corporate earnings, the inclusion of Indian bonds in JPMorgan's Global Bond Index has had a positive impact on the outlook for the Indian equity markets as this will increase the visibility and attractiveness of India to global investors.
Vinit Bolinjkar, head of research at Ventura Securities Ltd, said the inclusion of Indian bonds in the JPMorgan index will increase the flow of foreign investment into India, improve liquidity, reduce borrowing costs, and strengthen the rupee.
VALUATIONS NO DETERRENT
Market participants said valuations of Indian equities have and will continue to be on the higher side, but this won’t deter investors. The optimism is attributed to the country’s strong growth story, resilient corporate earnings and domestic consumption, and the improved global economic outlook.
Among sectors, participants believe automobiles and information technology are fairly valued. While automobile stocks seem attractive given improving demand and the government's focus on electric vehicles, IT stock valuations are justified by digitisation of the Indian economy and growing demand for IT services from Indian companies, analysts said.
Pankaj Pandey, head of retail research at ICICI Securities Ltd, said large-cap stocks are more attractive even now because they have not seen much price appreciation.
India’s anticipated high growth over the next decade, constant foreign inflows, and robust domestic consumption support the current rally, said Nikunj Saraf, vice-president at Choice Wealth Pvt Ltd.
Saraf said the outperformance of mid- and small-cap stocks since April, coupled with substantial mutual fund inflows into these segments, has played a pivotal role in the broader market rally.
Participants now believe the general election, due in Apr-May, will decide the direction of the market. Investors will be wary of any sign that may point to a setback for the ruling Bharatiya Janata Party.
Elections create uncertainty and volatility in the market as investors are unsure about the policies of the new government. This uncertainty leads to increased trading activity and volatility. While political observers expect the ruling party to win the election, any negative surprise could trigger a fall in the Nifty 50.
"The upcoming elections add another layer of intrigue, with historical data indicating an average return of 6% in the month before elections and 29.1% in the year leading up to them," said Saraf.
Jain of YES Securities said that more than the Interim Budget for 2024-25 (Apr-Mar), participants will be keen to see how the new government lays out the budgetary framework for the next five years. Budgets have a direct impact on specific sectors or industries, depending on the allocation of funds and tax policies.
"The market's reaction to a budget is often immediate, as investors assess the potential impact on corporate profits, economic growth, and government debt levels," said Bolinjkar. End