An Eye on Equity Market in November ’23

The Indian equity markets surged significantly during November 2023, and benchmark indices such as Nifty and S&P BSE Sensex ended the month about 5% higher than in October 2023.  

Mid-cap and small-cap indices outperformed the large-cap benchmarks. A few key drivers during the month include rising consensus that the US Fed rate has peaked. The probability of US recession is receding, a fall in oil prices, a temporary ceasefire between Israel and Hamas, revision of the US  Sovereign rating outlook to negative from stable by Moody’s, and resilient domestic growth, among others. 

Most sector indices spiked month-on-month, with oil and gas, healthcare, power, auto, capital goods, and metals being the key outperforming sectors. 

Foreign Portfolio Investors (FPIs) bought equities worth US$ 1.1 billion in November 2023 as opposed to net equity sold worth US$ 3.0 billion in October 2023. The FPIs have bought equities worth US$ 16 billion in 8MFY24 (8MFY23: US$ 3.3 billion). 

On the other hand, Domestic Institutional Investors (DIIs) bought net equity worth US$ 3.4 billion in October 2023  (September 2023: US$ 2.5 billion) and have cumulatively bought equity worth US$ 9.0 billion in 7MFY24 (7MFY23: US$ 19.9 billion). 

Similarly, flows to Mutual Funds (MF) increased to Rs 27,000 crore in October 2023 compared to Rs 24,000 crore a month earlier. Cumulatively, MF flows in equity-oriented schemes in 7MFY24 stood at Rs 1,12,000 crore. 

In Q2FY24 results, earnings of Public Sector Undertaking (PSU) banks, oil and gas, auto, pharma and capital goods sectors were better than expected, while those of private banks,  Non-Banking Financial Companies (NBFCs), metals, cement, consumer staples, and durables were in line with expectations. The results of Information Technology (IT) and chemicals were lower than expected. 

As of November 30, 2023, Nifty 50 traded at 18.7 times FY25E price to earnings multiple. 

Furthermore, market cap-to-GDP stood at 102% (based on  CY24 GDP estimates), and the gap between 10-year government securities (G-Secs) yield and 1-year-Forward Nifty 50 earnings yield also remains high [Earnings yield = 1/ (one year forward P/E)]. Current valuation multiples are at a slightly elevated level vis-à-vis the historical averages. However, one should view these valuations in the context of structurally attractive nominal GDP growth, a healthy corporate earnings outlook, and robust de-levered corporate and banking balance sheets. 

The sharp broad-based rally in the current financial year has resulted in small-cap and mid-cap indices significantly outperforming, and they now trade at a material premium to their long-term average valuation. However, large-cap valuations remain at a modest premium. 

Analysts remain positive on equities over the medium to long term, considering the structurally robust domestic growth outlook, healthy corporate profitability, and pro-growth policies. According to experts, a sharp slowdown in global growth, escalation of geopolitical tensions, and re-acceleration in inflation globally or locally are material near-term risks. 

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