Even as worries of high valuation and rising interest rates in the US give pause to some investors, Axis Securities has reiterated its positive outlook on Indian equity markets in its latest report for September 2023. The broking arm of Axis Bank highlights that the structural trend for the market remains positive, however, it expects some moneys to shift to the large-cap stocks from the broader universe.
Axis expects Nifty EPS to grow at 15% and 13% in FY24 and FY25 respectively, higher than historical trends. Upgrades are seen in financials, auto and oil & gas sectors after Q1FY24 results.
Poised For Growth
Axis Securities believes India is well-placed for long-term growth, underpinned by a robust economic outlook compared to global volatility. The top domestic growth drivers include improving private and public Capex cycle, strong earnings trajectory, healthy demand environment, stability in inflation and currency, favorable relative valuations, and resilient domestic flows.
The broker expects the improving Capex cycle to boost economic activity, as increasing infrastructure spending by the government is coupled with early signs of revival in private investments. The banks are also well-capitalized to support credit growth.
Most sectors like autos, real estate, capital goods are seeing strong demand. Rural consumption is also expected to rebound with good Rabi harvest and moderating inflation.
CPI inflation seems to have peaked and is expected to moderate as commodity prices cool off. Rupee has also been range-bound against the dollar providing stability on the currency front.
India is trading at a premium to EMs, but the premium has moderated from earlier excessive levels. This should attract foreign flows given the favorable relative valuations.
Retail investors have shown maturity despite global volatility. Domestic institutional flows remain strong and supportive despite global headwinds.
Axis Securities believes these tailwinds are strong enough to offset global headwinds like rising interest rates, recession fears in the developed world and geopolitical issues. It maintains a December 2023 Nifty target of 20,200 based on 20x FY24 earnings. The target may be raised to 22,200 in a bull case of reduced volatility and soft landing in the US, while 18,200 is the bear case if tensions escalate.
“In the last couple of months, strong recovery was seen in the broader market after the bottom seen in Mar’23, thanks to improved sentiments at the macro level. From here onwards, the market is likely to see a style and sector rotation,” it said.
However, it pointed out that with the strong catch-up of midcaps and smallcaps in the last couple of months, “the margin of safety” has reduced as compared to that available in largecaps.
“Keeping this in view, the broader market may see some time correction in the near term while flows likely shift to largecaps. However, the long-term story of the broader market continues to remain attractive,” it added.
As such, near-term volatility cannot be ruled out as the market responds to evolving macro data.
Some key things to watch out for include:
Progress of monsoon in September will be crucial as a sub-normal July has increased concerns. Any negative surprise on rainfall could spook markets in the short run, it noted.
Secondly, the high interest rate environment in the US has led to rising bond yields globally. The direction of the 10-year US Treasury yield and the dollar index will have an impact on foreign flows.
Markets await guidance on interest rates from the 21-22 September US Fed meeting. Aggressive rate hikes so far have increased global slowdown risks. Investors will watch for signals on terminal rates amidst mixed US inflation data, the broker said.
Third – markets have priced in strong earnings growth in FY24-FY25. Hence, any downgrades to estimates due to global pressures can produce volatility. Management commentary on demand outlook will also be crucial.
While cooling commodity prices have offered relief on the inflation and margins front, geopolitical issues pose risks of recurrent spikes in prices of crude oil, metals and agri commodities.
Broader markets have rebounded sharply from March lows, reducing the valuation comfort vis-à-vis large caps. Some consolidation in mid and small caps can be expected in the near term, it added.
Within sectors, interest is likely to shift towards banks, autos and consumers from metals, energy and pharma.
Axis Securities advises long-term investors to utilize any market corrections to buy quality names. It suggests maintaining 10% liquidity to deploy in a phased manner for 12-18 month investment horizons. The current environment warrants a “buy on dips” approach.