Market marginally overvalued, timing of rate cut pivotal, says Vinod Nair of Geojit

Despite global uncertainties, the stock market has maintained a steady upward trajectory, solidifying its global prominence. Hitting record highs over 20 times just in 2024 YTD (year-to-date), the benchmark Nifty has jumped 4.7 percent in this period.

On the back of the recent surge, Vinod Nair, Head of Research, Geojit Financial Services, believes that the market is marginally overvalued, as India’s valuations have contracted YTD from a one-year forward P/E of 23x to 20x. He further pointed out that the timing and extent of future interest rate cuts will play a pivotal role in shaping stock momentum for the remainder of the year.

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"It is imperative to closely monitor potential delays in rate cuts and any deceleration in earnings growth. Earnings growth in India is showing signs of contraction, with EPS growth expected to moderate to 5-10 percent in Q4 compared to the robust 25 percent experienced between April and December 2023. During this period of above-average valuation and economic slowdown, adopting a targeted approach focusing on individual stocks and industries is essential," said the expert.

Nifty trend

The benchmark index has gained 1.9 percent in April so far, extending gains for the third straight month. It rose 1.57 percent in March and 1.1 percent in February. Meanwhile, the benchmark was flat but in the red in January 2024.

Read here: 23,000 or 25,000? Here's where experts see Nifty 50 by FY25-end

Speculation regarding a potential interest rate reduction by the US Federal Reserve, coupled with ample liquidity in the market, has contributed significantly. Positive sentiments prevailing in global markets, coupled with strong performances during the fourth quarter of 2024, have also played a role. Additionally, there's anticipation of a recovery in the Chinese economy, further bolstering investor confidence and driving market optimism.

Reasons for the rally

Indian stocks, in particular, have remained attractive to institutional investors due to the country's stable macroeconomic conditions and promising earnings outlook.

Meanwhile, the anticipation surrounding the Q4FY24 earnings season also suggests that major companies are gearing up to report strong earnings, buoyed by encouraging business updates.

Read here: Less chance of market repeating FY24 returns this year, says Krishnan VR of Marcellus

Furthermore, the prediction of a normal monsoon in India and the recent decline in oil prices from a 5-month peak have bolstered market sentiment in recent trading sessions.

Retail investor participation in Indian equities, as well, is on the rise, reflecting growing interest and trust in the stock market. This surge is evident through a substantial increase in demat accounts and robust inflows into mutual funds.

This trend not only diversifies the investor base but also provides a sturdy foundation for the market. Despite challenges such as significant outflows from foreign portfolio investors (FPIs), the increasing involvement of retail investors serves as a buffer, enhancing market resilience and stability.

Read here: At record high! Sensex took just 24 sessions to jump from 74,000 to 75,000

Outlook

India's robust economic outlook and the growing involvement of retail investors suggest that the remarkable rally in the Indian stock market may persist. The expanding presence of retail investors serves as a safeguard, mitigating the impact of potential downturns, including any foreign capital outflows resulting from delayed or minimal adjustments to interest rates by the US Federal Reserve.

Going ahead, Nair is particularly inclined towards domestically driven sectors such as FMCG, Infrastructure, Cement, and Telecom due to their stable demand outlook for FY25 and the potential for reduced operational costs. Additionally, defensive sectors like IT and pharma offer resilience over the medium to long term, owing to their stable margin projections, lower input costs, and potential gains from a stronger dollar, he added.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.