Is Indian stock market headed for a bull run again?
What's the story
Indian equities witnessed a strong rally today, with Nifty crossing the 24,000 mark. The midcaps and smallcaps also outperformed, aided by easing geopolitical tensions and strong domestic inflows. The market's recovery is impressive not just for its speed but because it comes after months of relentless foreign selling and fears of expensive valuations leading to a deeper correction. As investors rush to buy dips, a question is dominating Dalal Street conversations: could the worst finally be over for the market?
Support
Domestic inflows have provided crucial support
The biggest support for Indian equities is the relentless domestic inflows. Despite weak market returns over the last two years, SIP inflows remain strong while the EPFO and retirement-related allocations continue to invest in equities every month. This steady domestic bid has repeatedly absorbed foreign selling and prevented deeper market damage. This is a stark contrast from past bear markets where both foreign and domestic money exited simultaneously.
Recovery
Panic selling may largely be over
By March-April, the sentiment had turned extremely bearish with foreign investors selling aggressively and midcaps/smallcaps correcting sharply. However, once geopolitical fears eased slightly and crude oil prices stabilized, investors rushed back into beaten-down parts of the market. The sharp rebound itself suggests forced selling and panic unwinding might largely be behind us. This indicates a potential end to the market's panic phase.
Profit resilience
Earnings resilience preventing deeper correction
Despite a slowdown in earnings growth, India Inc is not facing a full-blown profit recession. Several sectors like industrials, power, capital goods, telecom and utilities continue to report strong order books and investment activity. This has prevented markets from slipping into a deeper earnings-driven bear phase. The resilience of these sectors has contributed to the overall stability of the Indian market.
Market sentiment
Global risk appetite improving, benefiting Indian market
Globally, markets have become less fearful of an immediate macro shock. Expectations of future rate cuts by major central banks, stabilizing US economic data, and easing fears of a wider West Asia conflict have improved risk appetite across global equities. Emerging markets including India, have benefited from this shift in sentiment despite foreign investors remaining selective. This improvement in global risk appetite has positively impacted the Indian market's performance.
Market caution
Valuation concerns may limit foreign investors' return to India
The picture is not all rosy. Indian equities continue to trade at a significant premium to most global markets. Foreign investors are still skeptical about whether the earnings growth is strong enough to justify these high valuations. Also, concerns over margin compression, slowing consumption, and uneven global growth persist. These factors could prevent the emergence of a new bull market in India.