Diwali, the festival of lights, illuminates the hearts and homes of millions across India. Beyond the mere sparkle of lamps and the burst of fireworks, Diwali also carries immense significance in the realm of wealth.
That’s why Diwali is also the time when both seasoned investors and amateurs try to make strategic moves, hoping to ride the wave of luck and secure profitable investments.
In the year leading up to this Diwali (as on October 27, 2023), the market has proven to be quite favourable to investors. The S&P-BSE Sensex has delivered a little over 7 per cent, while both the mid-cap and the small-cap indices have surpassed this with a wide margin. The BSE Mid-cap and BSE Small-cap indices have delivered 24.24 per cent and 28.31 per cent, respectively, over the period, adding further excitement. Investors are now eagerly planning their next move to add more sparkle to their portfolio.
The only concern that could throw a spanner in the fireworks is some major “geo-political” upheaval and elevated global interest rates. After reaching a new high of 67,838 on the BSE-Sensex on September 15, 2023, the market has fallen by around 6 per cent (as we go to press) due to geopolitical concerns.
Unfavourable Global Factors
In India’s booming financial market, recent global challenges have caused a bit of uncertainty. The geopolitical tensions between Israel and Hamas have heightened concerns among investors about increasing geopolitical risks in the financial markets.
This conflict will potentially lead to a rise in oil prices and cause fresh challenges for the global economy, and more so for India.
Says Anshul Arzare, joint managing director and CEO, Yes Securities: “The global markets, including India, appear to be adopting a ‘wait and see’ approach in response to the ongoing geopolitical crisis in the Middle East, and the impact of that on oil, which so far has been muted.” Rise in oil prices could negatively affect India’s current account deficit (CAD) and potentially contribute to inflationary pressures, as India imports the majority of its oil requirements, he adds.
Also, if oil crosses $95 per barrel, India’s import bill will rise. This may impact the short-term sentiments in the market. In such a scenario, if the conflict escalates and lingers on, the market will react negatively.
However, other experts are of the view that the Israel-Hamas conflict won’t affect market sentiments negatively. “Unlike the Russia-Ukraine situation, the ongoing Israel-Palestine conflict is much smaller in scale both in terms of the geographical involvement and the global trade impact. Thus, the overall impact on commodities or the capital market, including equities, is expected to be limited,” says Pankaj Pandey, head, retail research, ICICI Securities.
On the other side, fluctuation in global bond yields has sent ripples through the equity market, both locally and globally.
“The spike in US 10-year bond yields to 16-year-high levels spooked the equity market globally, including India. This has now cooled off to around 4.56 per cent levels thanks to US Fed minutes commentary that indicate a rate pause,” says Arzare.
Globally, inflation is at heightened levels and beyond the comfort level of the US Federal Reserve. In this scenario, any further rate hike could upset the market mood. “Equity markets would be keenly reacting to the rate and/or yield movements, especially Indian markets, given the expensive valuations prevailing in the broader mid-cap and small-cap segments,” Motilal Oswal writes in its India Strategy Report released in October 2023.
Resilience On Domestic Front
Amid all these challenges, India’s financial markets have continued to show resilience. India stands tall with robust corporate earnings, stable inflation rate, and a burgeoning domestic investor base.
Economy: ICICI Securities says in its recent report: “With gross domestic product (GDP) growth of 6.5 per cent likely in FY24, India will again be leading the GDP growth rate globally. With global growth dwindling, the outperformance of Indian economy will increase further, making Indian equities an attractive destination.”
The situation is similar on the inflation front. The Reserve Bank of India (RBI) in its October policy, said that its retail inflation forecast remains unchanged and it sees it averaging 5.4 per cent in FY24.
While globally inflation remains stickier, in India, it seems to be on a falling trajectory. In September 2023, India’s retail inflation decreased to its lowest level in three months, reaching 5.02 per cent.
Election—The Mega Event: The battle of the ballots will commence with Diwali in four major states: Rajasthan, Madhya Pradesh, Telangana, and Chhattisgarh. These state elections will set the stage for the highly anticipated General Elections of 2024. The election results may keep the market volatile. The good news is that despite this inherent uncertainty on the ballot results, historical trends are in favour of pre-election rally.
“Since the last five consecutive Lok Sabha elections (i.e., from 1999 to 2019), Nifty has rallied 10-35 per cent for six months until the announcement of the election results (November-May period),” Motilal Oswal Financial Services in its India Strategy Report.
Domestic Investors: Domestic investors in India have gained momentum in the last few years with liquidity flows also shifting. Mutual Fund systematic investment plans (SIPs) flows have seen a consistent growth. Annual flows have increased from Rs 60,000 crore in 2017 to Rs 1.8 lakh crore in 2023, or about Rs 15,000 crore per month. On the other hand, Employees’ Provident Fund Organisation’s (EPFO’s) deployment has driven the assets under management (AUM) of exchange-traded fund (ETF) from Rs 7,000 crore in July 2015 to Rs 5.5 lakh crore at present.
Says Pandey: “The heartening thing to note is that domestic retail investors are not only getting mature and consistent in terms of investing through SIPs, they are also getting smarter. We have noticed in the last couple of years that every time the equity market is down, investors are putting in higher amounts.”
Robust Corporate Earnings: The favourable growth in corporate earnings bodes well for the market. For the July-September 2023 quarter, companies have posted decent set of numbers so far Analysts are also anticipating good set of numbers going forward.
“India’s Nifty earnings growth in Q1FY24 sprouted at an impressive 36 per cent year-on-year (y-o-y). Looking ahead, the forecast for FY23-25 indicates a healthy compounded annual growth rate (CAGR) of 16.5 per cent,” ICICI Securities wrote in a recent analysis.
India’s inclusion in the Global Bond Indices is another positive for the Indian market. Adds Pandey: “India’s inclusion in Global Bond Indices will ensure structural inflows, which could be akin to the ‘1992 reform’ moment, which had led to foreign institutional investors (FIIs) becoming a dominant force in equities. Similarly, a structural story could also play out over the next decade, lending support for yield decline as well as currency.”
With robust corporate earnings, favourable growth and inflation dynamics, wiser domestic investors, limited geopolitical worries, and structural reforms, there are ample opportunities in the Indian equity market.
As we approach Diwali, we approached five top brokerages—HDFC Securities, ICICI Direct, IDBI Capital, IIFL Securities, and Motilal Oswal Financial Services—for their top stock picks. These 10 hand-picked stocks may be considered for investment if you are convinced of their fundamentals and numbers and if stock investing suits your needs. The stock details we have provided may help you decide. Happy investing and a very Happy Diwali!
kundan@outlookindia.com