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    Why Nifty is showing no signs of topping out yet

    Synopsis

    With the recent rate hikes, inflation has started coming down. This will also help companies with decent debt equity ratio to improve their margins. Considering all these factors, there are no indications of topping the indices. However, having said that we may see some shift to the value stocks from expensive stocks.

    Why Nifty is showing no signs of topping out yetAgencies
    Both the benchmark indices, Nifty and Sensex, have been achieving new highs in the past few days post dovish commentary from the US Fed, and it seems that bulls are still ruling the markets. The question remains can the indices sustain their bullish run based on our strong economic fundamentals or are bears lurking around.

    Economic resilience
    India is a $3 trillion economy and is moving towards the $5 trillion mark as the growth rate picks up. The foundation has been laid with numerous changes and policy initiatives already in place. It is also the fastest growing major economy in the world, majorly driven by domestic demand. Despite being the fifth largest economy in the world, India has limited weightage in global indices.

    The economy is at the cusp of a new capex cycle. Credit growth has started picking up in the last 2 quarters post covid & with the momentum in the economy. Non-performing assets (NPAs) of the banking sector have started coming down for the last few quarters and even recoveries are improving.

    The government has taken many legislative measures for the improvement of the logistics sector. This will help in reducing overall logistics costs for the corporate sector in the next few years.

    The recent EPFO data is suggesting that there is an improvement in the job creation data. Q2 FY 23 of GDP growth of 6.3% is in line with RBI projection, Fiscal deficit is also within projected range.

    The Indian Stock Market
    Sensex is currently trading at P/E of 23 & NIFTY is trading at P/E of 22. Consensus earnings growth for NIFTY companies for FY 23 is expected to be 20% & FY 24 it is expected to be at 18%. Thus, the forward valuation of NIFTY to FY 24 & FY 25 earnings is below 20 at current levels. In the last 15 years NIFTY & Sensex have traded at highest P/E of 27 & lowest P/E of 12. The earnings growth for next 2 years for NIFTY & Sensex company’s earnings is expected to be robust.

    With the recent rate hikes, inflation has started coming down. This will also help companies with decent debt equity ratio to improve their margins. Considering all these factors, there are no indications of topping the indices. However, having said that we may see some shift to the value stocks from expensive stocks.

    Sector Outlook
    Recently we saw some shift in the banking sector investments towards PSU banking stocks as some good stocks like SBI, Bank of Baroda, Canara Bank, PNB, Union Bank were available at deep discount and overall credentials for the BFSI sector improved substantially. This journey of shift will continue for some more time.

    As the income level of people improves and awareness increases, the insurance sector is also expected to do well. However, those companies, who are able to garner more market share will be the winners.

    With the new capex cycle picking up, we expect the infrastructure and logistic sector to do well. The current valuations for the logistic sector are expensive. However, there is good scope of earnings expansion for the sector & Q2 FY 23 results for most of the companies were robust.

    For the metal sector, many large companies have reduced their debt levels & strengthened their balance sheets. The prices of metals have corrected from the peak levels & with the new capex cycle picking up the demand is expected to pick up for the sector. Though the sector is cyclical, there is likely to be an earnings expansion for the sector.

    The government is also focusing quite a lot on defence and railway sectors and has allocated higher budgets towards them. We have recently observed a rally in both the sectors. The outlook continues to be positive, however, investors need to consider investing at lower levels.

    The outlook for the economy and the indices is strong, and several sectors such as logistics and infrastructure, banking can drive the market’s growth going forward. The government’s push towards structural sectors will further strengthen the economy which is already experiencing growth due to robust demand.

    (The author is Whole Time Director and Head – Institutional Business at Arihant Capital)

    (Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)



    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

    (What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2024 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

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    (What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2024 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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