Despite the recent market rally, analysts warn of prematurely calling the rebound as a bull revival, with lingering concerns over weak domestic growth, global trade tensions, and stretched small-cap valuations clouding the outlook
After nearly six months of market downturn starting last October, the recent rebound in Indian equities, particularly following Trump’s ‘Liberation Day’ tariff announcements is being seen by many as an early sign of a bull market revival. However, that hypothesis seems flawed, especially when put under the lens of the prevailing headwinds that continue to put the future of Indian equities under dark clouds.
Analysts at Nuvama Institutional Equities argued that they based the October-March bear phase of the market on three key concerns-- tight liquidity, weak domestic growth and lofty valuations. Of these, the analysts note that only liquidity concerns have eased a bit in the last three months, causing the broader market to recoup a third of its loss. “The other two factors offer little solace amid growth concerns aggravating and valuations staying elevated,” the brokerage wrote.
Along the same lines, analysts at Kotak Institutional Equities also rang alarm bells over the recent market uptick, attributing the rebound to some degree of complacency and far reaching optimism.
The fact that the market is trading above “Liberation Day” levels would suggest that all issues have been fixed, however, the reality is much different, the brokerage cautioned.
Adding to the bearishness, KIE flagged high likelihood of lower global and domestic GDP growth, a long wait for reciprocal tariffs and trade issues to be resolved, a further cut in India Inc’s earnings expectations, and rich multiples across sectors and companies. It is a culmination of these looming concerns that has kept KIE analysts skeptical over the Indian market.
More than large cap stocks, it is the broader market, which houses small and midcap names, that remains vulnerable to a selloff if investor sentiment weakens. Since bottoming out in February, the small and midcap indices have recovered about one third of its fall from the September highs. However, Nuvama cautioned that while liquidity concerns have eased, growth woes have accentuated for this pocket of the market, not just owing to Trump’s tariff wars, but also broadening of the domestic slowdown to strong urban holdouts.
“Furthermore, fiscal consolidation and corporates’ aggressive cost cutting are reinforcing the downturn. We argue liquidity easing alone shall not be able to revive growth. Falling oil prices could prop up earnings in pockets, but not across the board as the fall is demand-induced and not supply. This along with elevated valuations suggests that the current rally perhaps may not be a bull market dawn,” Nuvama wrote in a note.
Nuvama also flagged persistently high valuations in the small and midcap space, even after the recent correction. “On a relative basis, small and midcap valuation premiums are lofty. Compared to both large caps and their global peers, valuation premiums are way too high. Such high valuation premiums can only be justified by higher growth. Unfortunately, today both are missing,” it noted.
The brokerage concluded that while the earlier selloff in small and midcaps was driven by a liquidity scare, a growth-related downturn is yet to play out, suggesting the broadBer market may not have found a bottom yet.
Moving on from the broader markets, KIE highlighted a slew of uncertain outcomes that will have a bearing on the fate of domestic markets. Sitting at the forefront are trade negotiations and changes in the world economic order.
Firstly, Kotak remains skeptical over the completion of negotiations around trade agreements between various countries (including India) and the US before the 90-day relief period expires in early July.
How these tariffs barriers eventually roll out will have a huge say in the future of the global equities and economic growth, however, for now, only uncertainty prevails.