valuations: Valuations remain elevated, retail investors urged to stay disciplined – News Air Insight

The past one year has been unusual for Indian equities. For long, India has been among the best-performing markets globally, but that has changed. Compared with peers like the US, China, Korea, Taiwan, Japan, and even Europe, Indian equities have not kept pace. For investors who entered the market after 2020 and are used to seeing India outperform, this reversal may feel uncomfortable. Yet, it is precisely in such phases that opportunities often emerge.

What held Indian equities back?

One reason lies in starting valuation. A year ago, Indian equities were among the most expensive globally, with the MSCI India index trading at a steep premium to emerging market peers. Also, foreign portfolio investors pulled money out of India, rotating capital into cheaper markets such as Korea, Taiwan, and Brazil to name a few. Trade related uncertainties further weighed on sentiment and kept returns muted.

Foreign outflows, however, were met by unprecedented domestic inflows. Indian households continued to invest via mutual funds and SIPs, with domestic institutions infusing record sums into the market. In fact, households now own more of the market than foreign investors do, a structural change that is reshaping India’s market profile. Still, the lack of fresh foreign flows meant Indian equities’ performance trailed global peers.

Strong Macros
What makes this period unusual is that despite robust fundamentals, the equity performance remained weak. GDP growth is at 7.8%, fiscal deficit is contained at 4.4%, and the current account deficit is at a two-decade low. Inflation is also at its lowest since 2011, giving policymakers room to support growth.

The government’s recent GST cut is a timely booster for consumption, as demand had begun to soften. As a result, corporate earnings are expected to pick up in the coming quarters. Add to this the structural reforms in infrastructure and manufacturing, India’s economic backdrop looks stronger than in most previous market cycles.Risks Factors
Two of the biggest risk factors remain valuations and investor exuberance. While India is now a contrarian market in terms of relative performance, it is not cheap. Investors need to recognize that while strong macros support sentiment, elevated valuations can limit returns. Furthermore, with the markets having delivered robust returns for over a decade, it is natural for a degree of complacency to set in. This is reflective in the elevated fundraising across public and private markets. This calls for caution. Also, retail investors who have been investing without considering valuations can suddenly turn risk averse owing to stagnant returns.

What should retail investors do?
To begin with, a near term rally can be expected if there is a good trade treaty with the US signed in the near future. For individual investors, even after one year of no return, we still believe asset allocation is the way to go. Stay disciplined, avoid chasing fads, and build a balanced portfolio. In valuation terms, large caps are better placed than mid and small caps. Large caps offer better valuation comfort and earnings visibility than smaller companies, which are prone to sharp corrections when sentiment shifts. For those looking at making lump sum investment, asset allocation is the way to go through lump sum investment in hybrid strategies. For those looking at making staggered investments, SIPs in large cap, flexi cap and multi cap strategies seem appropriate.

(The writer is CIO , ICICI Prudential AMC)