Indian equity markets are showing signs of renewed resilience with over 1% back-to-back returns in June and July, according to ETMarkets. The positive momentum persists despite geopolitical tensions in the Middle East and subsequent oil price volatility. The AI story has cooled off globally, which has helped India as it is seen as a net AI loser. This global AI theme decline has provided relief to Indian markets after 18-24 months of underperformance due to the AI theme doing well globally.
According to ETMarkets, Q1 results have been better than expectations with management commentaries suggesting positive momentum should continue. There was an expectation of margins being under pressure due to inflation as crude prices and several input costs had increased due to the war in West Asia. However, good volume growth with margins largely maintained has been observed. Additionally, no major impact on credit quality due to the war in West Asia has been noted, providing a good base for continued growth.
As reported by ETMarkets, private capex slowed down for the last one year due to tariff-related uncertainties, war in the Middle East, and spike in oil prices. However, this is viewed as a blip rather than a structural slowdown. Capacity utilization in the system is at 77%, usually triggering ordering when utilization crosses 75%. Credit growth is picking up in the system, corporate balance sheets are healthy, and cash flow generation is strong, indicating capex spending will pick up soon.
According to ETMarkets, FIIs have been sellers in India for the last two years driven by high valuations relative to other peers globally in FY25, earnings slowdown in India, and pickup in earnings growth in peer countries due to AI theme. However, questions are being asked on the AI theme given large capex spends by global players. India offers FIIs a diverse set of large companies that are growing at consistent rates with clear earnings visibility. India offers one of the highest numbers of companies with over USD 10 billion market capitalization, making it a long-term story for FIIs.
As reported by ETMarkets, large private sector banks and select consumption names offer reasonable valuations currently. Large private sector banks have underperformed markets and come to reasonable valuations while credit growth is picking up. Primary market activity is expected to remain strong with sufficient liquidity to absorb primary issues. The domestic funds have been receiving good inflows consistently and FII flows are turning positive, providing adequate liquidity for market absorption. Bank Julius Baer's Mark Matthews expects the Indian market to move higher as foreign selling appears to have abated, with Nifty's forward price-to-earnings multiple at around 18 times, making India cheaper than the US market.
