Current Indian Equity market outlook in this “manic depressive market " times

 

Hi!  Friends ,

 

   Am back again on my long term equity investing related blog at an interesting juncture  , when global markets have been very volatile again , reminding us of scary Covid days , when market used to tumble by 3-5% every day .  US markets tumbled by 11% in just 2 days last week , destroying wealth by 6 Trillion dollars just in US(approximately 1.5 times India GDP) & 10 Trillion $ globally , in just 2 days  . This reminded me of legendary Benjaman Graham (Guru of Warren Buffet and father of value investing) who famously said “ Mr Market is a manic depressive guy .   When he is in a good mood, he gets greedy and quotes ridiculously high prices, but when he is feeling depressed and fearful, he is willing to sell you the same stocks for rock bottom prices.” Graham  also said famously that “ In short run , market is a voting machine(unpredictable) but in the long run , it’s a weighing machine(reliable)” . Lets recall these timeless quotes and stay calm and not take any impulsive decision, swayed by wild manic depressive mood swings of the market . 

Last time , when markets were falling  and being very volatile (a month back in early March) , I had take a contrarian stand and said that Indian equity market is bottoming out and will show a positive trend then onwards . Nifty 50 did show a positive trend after the blog & went up from 22000 levels to about 23500 (7% increase in a month )till recently , when the Trump mania hit us with his so called  “Reciprocal tariffs”.  Nobody ( even the best investors and investment banks) could predict the amount of drama and damage his unpredictable and un-reasonable Tariff related policies (“reciprocal tariffs) could un-lease in a short time of less than a week . Even Covid has not seen such wealth destruction in such a short duration(few days).

 

Will quote Warren again who famously said “ Be fearful when others are greedy & be greedy when others are fearful” .  I guess , its time to be greedy in a selective and disciplined manner . will again take a similar stand that markets is bottoming out & we should start investing in high quality and high growth large cap(blue chip) Indian stocks/ business , which are available at lucrative prices (due to recent correction) in a staggered manner over next 1-2 months, now onwards. This year is going to be the stock picker year and hence go for high quality & high growth businesses with strong moats/ competive advantages , run by quality managements, available at attractive prices/valuations (because of the recent correction) . I would recommend restricting ourselves to large caps, mainly cause of valuation related reasons. With the Nifty 50 dipping by 14-15% from recent peak  , most of these attractive and quality businesses would be available at great  prices. 

 

Following are the reasons for my optimism(10 commandments/ reasons)

·        Tarriff / trade war related fears have been already discounted in the prices – Markets have fallen in double digits in last week (11-12 % in US and Europe, 13-15% in Asia pacific- Japan, Hongkong etc) . Nifty was the only market which fell in single digits, by about 5%. All the tariffs announcements as well as retaliatory announcements (from China etc) have come in and have been factored in the prices . Hence forward , only good news in terms of Trump backing down ( seeing the fierce opposition, global criticism & market mayhem) and negotiations starting between the key players( US , China , Canada , Europe etc). India has already started  the same with US through its BTA(Bilateral Treaty Agreement).

·        US & global recession fears are overblown – The fears on US recession is overblown and discounted in the prices  to some extent in the big market fall last week . US economy , just like Indian economy is very resilient and proved similar rumours of impending recession wrong in last couple of years . Secondly , Trump tactics is more of  a bullying drama to bring the stakeholders to table with a first  mover advantage . He & all the global leaders know that tariff war is a zero sum game &  lose situation for all . Soon people will be negotiating and striking trade deals , defusing the trade war and recession potential

·        India relatively on stronger wicket on Tariff war -  India is a very much domestically focussed economy (Exports at about 600 Bill $ is just 15% of its GDP ) while its 20% for China and higher for many other emerging economies and other countries. Out of that , Indian exports to US is just 90 Bil $(about 2% of India GDP) . So the potential negative impact on India GDP could  be only about 0.2 %( assuming that exports to US will reduce by 10%). That’s one of the reasons why Nifty went down by single digits only last week , when others fell by double digits including US markets . Besides , some of the sectors will gain like electronics , textile , footwear etc , as competition like China , Taiwan, Thailand, Indonesia etc have been slapped with higher tariffs . In fact some of the IT hardware and electronic / smart phone manufacturers  from China , Taiwan have sent feelers to shift their production to India to avail the lower tariffs in India .

·        Improving Geopolitical situation - The Geopolitical situation is improving with 2 wars (Israel - Hamas and Russia - Ukraine) at its final stages under new administration in US . Ukraine has already accepted the US proposal for an initial 30 days ceasefire , while Putin is expected to accept the same in few weeks.  Israel - Hamas were already under the first ceasefire for 2 months , when Israel broke the ceasefire by attacking Gaza in Mid-March. This week US & Israel leaders are discussing renewal of the truce at White house because of global pressure. Ending of these wars( though under uncomfortable cease fires & deals) will bring in lots of goodness to global economies as well as markets with uncertainties coming down and oil prices coming down significantly.

·        Oll prices and inflation coming down for India – Oil prices have come down from 86$ per barrel to less than 65$(about 25%). This is going down due to better Geopolitical/ wars situation, US increasing its gas/ oil production to improve its reserves , OPEC increasing its Oil supply , slowdown in developed world like EU, US etc . This will have salutary effects on big oil importers like India in terms of trade deficit reduction , stronger INR exchange prices , reduced inflation , reduced RBI rates etc. This will also improve the real GDP growth rate(Nominal growth rate minus inflation)

·        RBI monetary has become accommodative & dovish – RBI has started its rate reduction cycle already last month and is expected to again reduce the repo rate by 0.25% in its next meeting this month . Besides , it has eased the tight liquidity situation through its OMO and Dollar-INR long term swap tools by 80 Bil $( about Rs 7 lac crore) since January and is planning to infuse additional Rs 2 lac crore($24 Bil ) more by Mid year . This is and will drive the markets up. The lower inflation projections because of lower oil prices and better monsoon(last year) will help RBI to reduce the repo rates lower which will boost the credit cycle as well as stock markets up as cost of capital will come down .

·        Indian Market fairly valued or undervalued – Indian markets are fairly valued or bit undervalued because of recent correction .

 While some  pockets of Indian markets , especially small caps and mid caps are clearly over-valued , large caps(Nifty 50 companies) are under-valued by all significant parameters - PE trailing ratios , PE forward ratios as well as Warren Buffet Valuation Golden indicator(market capilaization / GDP ratio)      

1.      As per PE trailing ratios , Indian market(Nifty 50 – large caps) is sitting at 20.1  .  Last 5 years PE average was 23.9 .  Hence we are sitting   at a discount of 16% with respect to long term averages 

2.      As per PE 1 year Forward ratios , Indian markets are at 17.5 . Last 5 years PE average is 20.8  . Hence we are sitting at a discount of 15-16% 

3.      As per market cap / GDP ratio (Warren Buffet indicator)as per reliable data sources ,  the Indian market cap/ GDP ratio is 110%(As per Gurufocus.com).  As per this , Indian markets are fairly valued(90% to 111%) .

This shows that while Nifty 50( large cap companies) are under- valued , mid-cap and small cap are overly valued , making the aggregate valuation of the market fairly valued

• Dollar upvaluation and INR devaluation coming to an end - USD Index which went up to 110 in last many months, due to various reasons like Trump tariffs , Geopolitical situation/ wars , attractive 10  years treasury rates etc has started coming down. Its at 103 now. INR was going down due to above reasons and FIIs selling off in India to move their money to safer heavens in US . This has reversed now . In fact , INR has upvalued by 2% in last month ( from 87.6 to 86  per USD). In fact , its in the interest of US to keep USD down so that their exports don’t get negatively impacted.  These trends will be positive for India as strong and stable INR is good for FII returns and make Indian equity more attractive.
• Incorrect narratives on Indian economy slowdown -  There has been a lot of narratives ( seems to be herd mentality) around so called " Indian economy slow down" and "corporate earnings slow down"  . So called experts & media who influence the investing community through their narratives ignore the fact that this slow down for few quarters this fiscal year was not a structural and fundamental slowdown but a seasonal one induced because of  elections in Q1 & Q2  of this Fiscal quarter( elections were in  Q1 in April to June). This led to significant impact on Government capex & other expenditures which in turn had negative impact on private capex and earnings growth too. Businesses ( especially export oriented) also got impacted because of geopolitical tensions and developed economies slow down(EU , US , Japan etc). However, these are things of the past (especially election related slow down) . The GDP growth should show up good numbers (7-8%) Q1 of FY26 onwards (April onwards) because of favourable base effect (Q1 & Q2 of FY25 having elections related slow down) as well as lower inflation projections (cause of lower oil prices)
• Size and speed matters - India still the fastest growing  major economy in the world and Foreign investors(FIIs) don’t have too many choices . 

           Globally , India is still the fastest growing economy with expected GDP growth rates  , returning back to >7 % . With inflation of about 4.5%, this could mean a nominal growth rate of about 12% or more (nominal GDP is Real GDP plus inflation). India is the 5th largest economy today , contributing to about 4% of world economy . Its going to beat Japan this year(2025) and Germany by 2027( as per IMF calculations) to become the 3rd largest economy . China , the second largest economy grew at 2.8 % & US grew at 2.3% in 2024 and EU is almost in recession with almost nil growth rate . Can somebody afford to ignore this size of economy growing at the fastest speed ( Size and speed matters). In fact , FIIs have started returning back to Indian markets with vengeance last month(March) and pumped more than 31000 crore in last 6 days in March, before Trump mania hit the world .

 

 Key Recommendations & growth/return  projections : When it comes to NIFTY 50 targets , one should never venture into target predictions cause of market volatility and unpredictable nature in short & medium term .  However , historically NIFTY 50 & sensex  has given about 14% CAGR returns(15% plus including dividends). As the market is fairly valued (as per Warren indicator) or undervalued ( as per PE trailing and forward ratios)now cause of panic and doom sentiments , I would like to shoot for 20% or more upside for NIFTY 50 in next 12 months from current levels(by end of FY26). More attractive sectors  as per my analysis ( considering growth projections , current valuation , domestic market focus in this slowing global economy) are large cap & strong  businesses in  BFSI(Banking , Fin services & Insurance), Auto , Infra , capital goods, power , defence ,  Pharma/ healthcare, Telecom , Real estate , Chemicals & Travel/Hospitality sectors .  In long and medium term , there is no reason why NIFTY 50 won’t continue to give its historical 15% returns (doubling your investment every 5 years).  With good quality portfolio , you can always expect to beat the market by 4-5% or more (Alpha)  & double your investments every 4 years, which is quite decent by any standards. This is equivalent to 16 times in 16 years by magic of compounding (We underestimate the magic of compounding which can be achieved only through long term investing)  . If you don’t want to take the risk of picking up the right businesses / stocks , you could invest through index funds too(low cost and safe method of investing) . Last but not the least , in these times of big volatility , pl remember that your temperament/ calmness  & patience is more important than intellect and knowledge. I would also advice you to invest in Gold ETF funds(electronic gold) for 10-15% of your portfolio value  as its the best insurance against black swan events / wars and uncertainties like Trump mania . It will help you to cope up in extreme volatile situations as well as sudden liquidity requirements without selling equity at low prices . And avoid leverage for equity investing always