A recent report by Bernstein highlighted that India’s equity markets have underperformed fixed deposits over the past two years. The Nifty Compounded Annual Growth Rate (CAGR) for two years is 2.9 percent, while the Next 50 is flat. However, the Small and Midcap (SMID) segment performed better, with an increase of around 10 percent, primarily driven by the rally post-March. The modest returns reflect concerns about the global environment, rising rates, limited support from a broad-based economy, and high starting valuations.
Despite this, the outlook for Indian equity markets remains positive. Bernstein believes that strong economic parameters, strengthening domestic institutions, and growing retail participation will drive future growth. In 2022, while many markets around the world experienced double-digit declines, India showed resilience with a relatively subdued 4 percent decline. This lays the foundation for sustained high growth in the coming years, with Indian markets expected to deliver some of the highest returns among key markets worldwide.
The recovery of India’s GDP growth has also been strong, with first-quarter GDP at 7.8 percent. Although a modest reduction in growth rates is anticipated in the next few quarters due to election activity, various high-frequency indicators continue to show strength. The government has accelerated capital expenditure ahead of elections, and manufacturing activity has been scaling up. The Purchasing Managers’ Index (PMI) and Index of Industrial Production (IIP) are both positive at this stage. However, there are some risks to agricultural growth in the second half of the year, but overall consumption volumes are expected to remain sluggish with moderated inflationary impacts.
In their model portfolio, Bernstein has introduced two new ideas and removed four stocks. They remain overweight on Financials with a small allocation to utilities, neutral on utilities, and overweight on consumer tech with a modest position in the IT sector. They also maintain an overweight position on building materials while being underweight on staples, autos, and metals.
Looking ahead, the brokerage suggests buying any corrections in the market given the rapid run-up since April. They see limited large downside risk due to supportive macro factors, resilient earnings growth, and lower risk in the broader corporate ecosystem.
As for the stocks portfolio, Bernstein has added NTPC and Paytm while removing Reliance and SBI. They have retained HDFC Bank and Axis Bank in Financials, Infosys in IT, Delhivery and Zomato in consumer tech, Biocon in healthcare, L&T in industrials, and UltraTech in cement.
NTPC, in particular, has a promising investment thesis. The company is a leading player in thermal power, which is crucial for addressing India’s rising power shortages. Additionally, NTPC’s cash flow from its coal plants will be vital for financing its renewable energy growth plans. The company also has a cost of capital advantage compared to private players and is well-positioned in the green hydrogen sector.
Overall, while Indian equity markets have seen modest returns in recent years, the positive outlook is driven by strong economic factors, improving domestic institutions, and growing retail participation.
Definitions:
– Nifty: A benchmark index of the National Stock Exchange of India (NSE) that represents the performance of 50 large-cap stocks listed on the exchange.
– CAGR: Compounded Annual Growth Rate measures the average annual growth rate over a specified period.
– SMID: Small and Midcap refers to the segment of the market consisting of companies with medium market capitalization.
– GDP: Gross Domestic Product represents the total value of goods and services produced within a country in a specific period.
– PMI: Purchasing Managers’ Index is an indicator of economic health in the manufacturing sector.
– IIP: Index of Industrial Production measures changes in the volume of production in various industrial sectors.
Source: Bernstein Report