Indian equities are on a relentless upward trajectory, fueled by robust macroeconomic indicators, solid corporate fundamentals, and strong domestic equity inflows, according to a recent report by UBS. Despite facing increased volatility due to global challenges, the Indian stock market has hit record highs. Particularly noteworthy is the remarkable outperformance of small and mid-cap (SMID) companies over the past few years.
As the fourth-quarter earnings season progresses, early reports indicate an improvement in the quality of earnings growth. With more than half of BSE100 companies having reported, there's a notable uptick in beats compared to misses. Sectors like consumer durables, metals and mining, IT, healthcare, autos, cement, and financials have shown positive surprises in profit growth, while others like oil & gas, chemicals, and industrials have faced higher disappointments.
Despite global headwinds, domestic mutual funds continue to bolster the market, offsetting foreign portfolio investor outflows. However, UBS advises caution regarding SMID companies due to their rich valuations. These companies have significantly outperformed large-caps in recent years, leading to steep valuation differentials. UBS suggests investors take profits in SMIDs and shift focus towards large-caps, which are relatively better placed in terms of earnings growth and resilience to higher oil prices.
Looking ahead, UBS maintains a positive outlook on earnings growth, projecting a 12–13% increase for the Nifty 50 in FY25. However, amidst global uncertainties and ongoing Indian elections, near-term market sentiment may be tempered. Nevertheless, UBS anticipates any correction to be limited, given the strong macroeconomic backdrop and healthy corporate earnings.
Identifying key risks for Indian markets, UBS highlights factors such as political instability during elections, potential delays in the US rate-cut cycle, and geopolitical shocks like surges in oil prices. Despite these risks, UBS recommends a strategic focus on domestic-linked sectors such as autos, consumer durables, industrials/infrastructure, utilities, and real estate, which offer long-term growth prospects supported by stable margins and healthy balance sheets.
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