India market performance: Valuations remain stretched; growth hopes pinned on second half recovery: Ashish Gupta

“Since April we have seen foreign flows turning positive, but they have not been very strong. If I recollect correctly, in the last three months we have had only about three, three-and-a-half billion dollars of net FII inflows and so, we have to look at our market performance in the broader context of the global equity market rally,” says Ashish Gupta, CIO, Axis Mutual Fund.I remember when we were talking about in March, you were saying do not be so pessimistic, the markets will improve, and the second half is going to be good. Do you think we have reached the pinnacle of that? Is all the good news already in the price now?Ashish Gupta: So, we actually look at India market from our own lens and the Indian market has, you are right, done quite well since March. But actually, if you look in the context of global markets, India YTD has actually underperformed many global markets. If you look at most of the emerging market universe or even the Asian markets, whether you look at Korea, Taiwan, Brazil, most of the markets are actually year to date in dollar terms up anywhere between 20% to 35%. So, we are actually in the midst of a major global equity rally. In the last couple of months, even the US market as you would have seen has clawed back most of its losses that were there in the past six months. So, in that sense the Indian market is not kind of standing out in the global context. Actually, what is interesting is that despite this relative underperformance, year to date foreign flows to the market have still been lacklustre.

So, since April we have seen foreign flows turning positive, but they have not been very strong. If I recollect correctly, in the last three months we have had only about three, three-and-a-half billion dollars of net FII inflows and so, we have to look at our market performance in the broader context of the global equity market rally.

We cannot be complacent given that there is a lot of uncertainty still out there. Since beginning of the year major macro events have played out whether in terms of geopolitics and even on tariffs and the impact of that has not been seen on the economic indicators. So, for example, US tariffs are up on average about 13% since the beginning of the year even after many of the roll backs and US CPI does not reflect that. So, some of these things play out with a lag. So, next couple of months we need to see the economic indicators actually playing out and then only we will be able to get a decisive direction for the market.

Give us a sense of where do you believe valuations are headed when it comes to across the market caps because you still believe that valuations may be slightly stretched but where are some pockets where you believe that the valuations have come down significantly and could merit a relook.Ashish Gupta: So, in terms of valuations, we are actually where we were six months ago, we have not really seen a major change in valuations. Nifty is about 21-22 times earnings. If you see some of the sectors that are demonstrating higher growth whether they are in the midcap space or even the larger cap, so wherever the growth outlook is stronger those stocks actually on a median basis are trading around 27-28 times. So, valuations are not inexpensive in the market. What is important is that we this year get the growth pick up that is being forecast. Last year market earnings growth had come down to about 6-7%. This year the expectation is that growth should pick up to about 11-12% and lot of it is actually hinging on a recovery in the second half. If we look at the trends in the first quarter on the macroeconomic trend in India, they have not really picked up, in fact many of the consumption basket is still relatively slow whether you look at FMCG or in your show you was earlier talking about even consumer durables. We have seen even some of the high frequency indicators like GST collections moderating to about 6%, power demand has also slowed, but some of that is seasonal because of the monsoon. And really the big hope is that in the second half on back of the good monsoon as well as all the liquidity infusion and rate cuts that have happened in the last six months, there is a pickup in the economy and that reflects in earnings. As of today, we are not seeing that. If you see even bank credit growth that still continues to be in single digit despite the liquidity infusion. So, we are placing a lot of expectations on a stronger second half given some of these macroeconomic developments.