Even as the stocks juggernaut rolls on, intermittent profit-taking may be the wisest choice

One of the many English words with an Indian origin is Juggernaut – the unstoppable – derived from the Rath Yatra for Lord Jagannath. The 2023 Rath Yatra coincided with the Juggernaut that the Indian stock market seems to have embarked upon. Indian stock indices extended their winning streak this week, hitting record highs on July 7, as foreign funds kept pumping the greenback into the equity markets even as there are niggling doubts about the up move. Investors seemed to be betting on other fundamentals, including a belief, or hope, that the worst of volatility in prices of crude and other commodities, emanating from the Russia-Ukraine war and interest rate hikes by central banks are behind us. The investors have pinned their hope on India being the biggest beneficiary of any economic slowdown in China and that too at a time when benchmark interest rates would go South only by the end of the year.

Overseas investors net bought shares worth $6.7 billion in June, carrying on from where they left in May when the figure had hit $5.0 crore, the highest in eight months.

One of the economic indicators that benefited India was the slowdown in retail inflation, in contrast with the conditions in the developed economies where price increases appear to be far from over and the interest-rate-hike cycle is expected to continue. Risk aversion towards emerging markets seems to be on the decline and this seems to be led by India this time. In their quest for greener pastures, foreign investors have ignored some of the somber indicators, including shrinking corporate margin, lack of resurgence in consumer demand post the COVID-19 pandemic, sedate capital investment plans from the private sector, and muted credit growth.

But as we said just now it is all about green pasture.

The latest data available shows China’s industrial output grew 3.5% in May from a year earlier, as manufacturers struggle with weak domestic and overseas demand. The data reinforced the view that a stimulus may be on the cards as policymakers face deflationary risks, mounting debts, record youth unemployment, and weakening global demand. China, the world’s second-largest economy, has set a conservative 5% growth target for 2023, the lowest in the past three decades at least, after missing last year’s target of 5.5% by 250 bps. In comparison, India’s Index of Industrial Production expanded by 4.2% in April (the latest available data), surprising economists on the upside, and the other most high-frequency indicators too improved relative to the preceding month.

Prime Minister Narendra Modi’s government is making efforts to project India as a strong alternative to China as companies such as Apple Inc scout for additional production facilities in Asia that are capable to meet global demand for its products. Some of these efforts are bearing fruits as many sectors have shown consistent growth over the years. Barring the pandemic year, steel output has consistently increased in the last six years and so has been the case with Indian cement production.

India’s economy has expanded amid a slow-growing global context by offering a chance for sustainable growth at a macro level. The underlying sentiment for India is buoyed by the Reserve Bank of India’s efforts to ensure that the flare-up in inflation earlier in the year is reversed with the near-predictable interest rate increases. While there is the occasional surge in some components of the consumer inflation basket, by and large, things have been under control. Risk aversion is decreasing but much of the equity purchases are at comparatively high valuation. The market capitalization of BSE-listed firms hit a lifetime peak of ₹ 301.97 lakh crore on Thursday, mirroring a positive trend in domestic equities, where benchmark index Sensex settled at a new record high.

Even as Sensex and Nifty are touching all-time high peaks every day, experts are of the view that valuations are far more reasonable now than that during October 2021 high. Indices are seemingly driven by momentum as several stocks that aren’t fundamentally strong, have advanced in the tidal waves. Investors should avoid risky bets as lofty valuations in some sectors and some companies make them vulnerable. Also, risk could emerge in terms of higher inflation and more hawkish US Fed commentary than what the market is expecting.

Many believe the market isn’t giving due credit to El Nino and its impact on monsoon rains and agricultural output which add to the inflation scare. If inflation, driven by food prices, flares up then the central bank may have to take consequent steps as it has made its position very clear that inflation control gains priority over supporting growth. The equity market’s run lacks depth and widespread participation as indicated by the spurt in volume in select stocks and the dearth of new issues. The undertone seems shaky as investors are still coming to terms with the shocks delivered by the much-hyped IPOs.

In a capital-starved nation, those with projects are skeptical to test the waters in the primary markets. As for the man on the street, intermittent profit-booking at intervals would be the wisest strategy to adopt. For the potentially emerging entrepreneurs seeking funds, the end of the winter season doesn’t seem to be in sight even as equity benchmarks indicate otherwise.