The BSE Sensex and Nifty50 indices rose for the first time in seven days yesterday as markets sought to stabilize after last week’s heavy hit.
The indices, however, succumbed to the global catastrophe in 2022 amid rising rates and high inflation. The Nifty is approaching a bear market, having fallen 17% from its lifetime peak.
However, compared to their global counterparts, Indian markets have shown resilience.
According to Motilal Oswal Financial Services, the MSCI India index has gained 7% over the past year while the MSCI emerging markets index has corrected by 22%.
Analysts attribute this outperformance to the unwavering confidence of domestic investors.
DIIs, for example, have pumped in around Rs 2.15 trillion so far this year, compared to an outflow from REITs of around Rs 3 trillion.
Naveen Kulkarni, Chief Investment Officer at Axis Securities, says DII is positive as India has already experienced high inflation. Sticky inflation is a challenge for the West, he says. Unexpected rise in inflation in developed markets making FII nervous.
Kulkarni expects stock markets to reverse the current downward trend once the global turmoil subsides.
Kulkarni says corporate earnings look strong and investors are waiting for global events to calm down. Once the interest rate hikes are settled, the focus will shift to the home front, he says.
Another upside is the attractive market valuation.
At the end of May, the Nifty had a one-year forward price-to-earnings ratio of 18.7 times, down from 23 times in October 2021.
The current valuation is a 4% discount to its 10-year average.
“Markets often need trigger events to conform to the universal law of mean reversion and the Russian-Ukrainian war is an example of that this time around,” says Santosh Meena, head of research at Swastika Investmart.
Meena recommends investors buy stocks with good fundamentals and strong financials, using the buy-down strategy.
That said, the risk of inflation continues to cloud the near-term outlook.
According to Kotak Institutional Equities, “a spike in inflation could cap bond yields and floor equity valuations. However, if inflation were to surprise on the upside, the already wide yield spread could turn more negative and likely lead to a further correction in equity multiples” – Kotak Institutional Equities
Against this backdrop, markets should continue to be constrained today given the lack of domestic triggers.