The fund manager believes after many years of subdued earnings growth, the current earnings cycle in India looks promising in the medium term.
“Historically, India has always traded at a premium to global markets due to the demographic dividend and reasonably stable policy environment. As the Indian market valuation is hovering close to its long-term average, the stock price returns henceforth will be largely driven by earnings growth,” Thomas said in his 2023 outlook report for equities.
“Domestic economic indicators continue to be reasonable. Credit demand and GST collections continue to remain healthy for many quarters in a row. Capacity utilization of the manufacturing sector surpassing the 70% mark indicates a possibility of private capex revival. Even in case of a global slowdown, the impact on India is likely to be minimal given India’s strong domestic linkage,” he said.
Indian markets were an outlier when most of the global markets clocked negative returns in 2022. Despite some volatility during the beginning of the year, markets recovered strongly towards the later half of the year. Both Sensex and Nifty erased all the losses and are currently in green on a year-to-date basis.
“The relatively stable equity market in India was a result of a smart economic recovery from the pandemic shock and the growing dominance of retail investors,” Thomas said.
“Over the past one-year, Indian markets were resilient and delivered positive returns compared to a double-digit decline in several of the global markets. India’s outperformance was supported by robust earnings despite the Covid shock. Another factor that supported the markets was strong flows from domestic retail investors. If we take the cumulative flows into equity markets since 2003, the share of flows since 2017 for foreign portfolio investors and domestic mutual fund investors stands at 15% and 78% respectively (Data as of Nov 30, 2022),” he said.
However, some risks persist that could dent the sentiments along the way. Current geopolitical tensions including the Russia-Ukraine war could trigger a rally in commodity prices including crude oil. Foreign investors could still prefer overseas markets post the recent correction in their valuations and FPI flows could be under pressure. Further, the worsening Covid situation in China could make investors nervous.