After several years of unabated earnings growth, the fund manager said, the earnings cycle in India looks promising in the medium term.
“Historically, India has always been overpriced to international markets due to its demographic divide and relatively stable policy environment. As Indian market valuations move closer to long-term averages, equity returns will henceforth be driven largely by earnings growth,” Thomas said in his 2023 outlook for equities. He said.
“Domestic economic indicators remain reasonable. Credit demand and GST collections remain healthy for several quarters. The manufacturing sector’s over 70% capacity utilization indicates a revival of private capex. Despite the global slowdown, India has strong domestic ties. The impact on India is likely to be minimal, he said.
In 2022, most of the global markets closed negative returns, while the Indian markets were the best. Despite some volatility at the beginning of the year, markets recovered strongly in the middle of the year. Both the Sensex and the Nifty have erased all losses and are currently in the green on the year-to-date.
“A relatively stable equity market in India is the result of a smart economic recovery from the pandemic shock and the dominance of retail investors,” Thomas said.
“In the past one year, Indian markets have been strong and have delivered positive returns compared to double-digit declines in many global markets. India’s performance has been supported by strong earnings despite the Covid shock. Another factor supporting the markets has been robust. Inflows from domestic retail investors have reached the highest level since 2003. If we take the equity market, since 2017, the share of inflows to foreign portfolio investors and domestic mutual fund investors is 15% and 78% respectively (data as of November 30, 2022), he said.
However, there are still some dangers that affect the mood along the way. Current geopolitical tensions, including the war between Russia and Ukraine, could trigger a rally in commodity prices, including crude oil. Foreign investors may still post a recent correction in their valuations and choose foreign markets that may be under pressure from FPI flows. In addition, the worsening of the Covid situation in China may also deter investors.