Why the bulls are rampaging on Dalal Street

Everyone reading this column, indeed every single person around the world who woke up this morning, has hit her all-time high age today. Is that a milestone? Given equity markets are aggregate values of all corporations that survive till this date, it’s hardly surprising that they regularly hit ‘all-time highs’ as time passes by. Sensex closed at 65,479 yesterday, breaching the 65,000 mark for the second time this week.The point is somewhat facetious off course. Markets don’t work on precise, predictable analytical lines. Psychology, expectations, sentiment play much larger roles, and prices can overshoot (or undershoot) for long periods of time. After a period of sluggishness, it seems that animal spirits have certainly caught up with the Indian markets. It’s certainly a ‘stars have come together’ moment for Markets-India (not necessarily a Macros-India, a distinction often forgotten), in more ways than one. For starters, corporate India is on an early stage of a cyclical upturn. After nearly a decade of anaemic profit growth (between FY2013 and FY2020, Nifty earnings grew by barely 4-5%), there is renewed spring in profitability. The biggest contributor to that is the deleveraging of India’s private sector balance sheets over the last decade. A long, painful adjustment process in banks is finally complete, with gross systemic non-performing asset (NPA) falling to 3.9%, a decadal low. This has not only magnified bank profitability – last year BFSI contributed nearly 200% of the growth in Nifty profits – but also enabled a fresh consumer credit cycle after Covid. The post-Covid K-shaped recovery has also segued into a firm demand growth trajectory at the top-end of the consumer pyramid. Luxury apartments, high-end cars, premium electronics are seeing demand hold up even as the Covid-era base effect wears off. That in turn is reversing another long-term trend, of concentration of profit pools. A broader base of companies is showing profit growth, leading to a larger investible universe for investors. ShowBlurbsThe other big star being aligned in India’s favour is global sentiment. Some of it is generic – after nearly 18 months of continuous tightening by major central banks, the liquidity tap seems to have been reversed. Global liquidity going up leads to enhanced appetite for all types of risk assets. Typically, India is an outsized beneficiary of such enhanced global risk appetite. But the other bit is uniquely positioned for India. And India must thank China for this. In the last three years, China has tried very hard to make itself unattractive to global investors. Its approach to certain domestic businesses (especially in the digital space) has been an irritant. But most materially, it is China’s geopolitics that has engendered serious concerns in political capitals around the world, radiating to corporate boardrooms. To be sure, China+1 is more talk than walk yet. Foreign Direct Investment (FDI) into China has remained quite strong – in 2022, FDI into China was nearly $190bn, up about 8% from 2021. But many investors, especially financial investors, have been disappointed with their China experience. In comparison, India has been a shining star – in the last 5 years, the MSCI India index is up 30%, as opposed to MSCI China which is down 30%! No wonder, the India toast has shinier sheen in global capitals and boardrooms.Last but not least, the big pole star in the alignment is strong confidence of domestic investors. Through major policy changes in 2016-17 (demonetisation, GST) to credit crisis in 2018-19 to Covid in 2020-21, the domestic retail investor has been the rock of Gibraltar. Flows have remained not just consistent but growing almost unfailingly at a consistent rate. This has effectively created a floor to equity prices, even when foreign investors have made large exits from India (from the latter half of 2021 till a few months ago). In some ways, it’s a throwback to 2003. Low systemic leverage – check. Corporate earnings rebounding from a low growth period – check. Supportive global liquidity – check. Enhanced politico-economic interest in India – check. Not everything is so sweetly aligned though – valuations today are above long-term averages, while they were at historic lows in 2004. But broadly, we have seen the story before. It did work out quite well, for a time. Before it didn’t, quite suddenly and brutally, first with the Taper Tantrum in 2013 and then rolling on to a prolonged funk for several years thereafter. As is the case with markets all the time. In short, any sense of inevitability about inexorable good outcomes needs to be tempered by deja vu from recent experience. Sentiments can turn in a jiffy, flows can turn negative quickly. Most importantly, India’s markets still represent a small, though growing, segment of India. It isn’t terribly reflective of India’s macro-economic outcomes. This new window of markets opportunity has to be taken advantage of to progress India’s macros – where we have many miles to go before we sleep.The writer is Chief Investment Officer, ASK Wealth Advisors. Views are personal