Currently, the performance of the economic indicators is not moving in line with the rise in the Indian equity market indices. Not withstanding a deterioration in the economy’s core sector, forecasts of a decline in GDP, budget cuts and a decline in consumption, BSE Sensex and Nifty have recently managed to maintain their unparalleled high of more than 40,000 points and more than 12,000 points respectively.
Markets tend to outperform macros and set prices for future growth. There are three positive growth indicators: the reduction in the corporate tax rate, the proposed divestiture of large public-sector entities, and the potential solution to the impasse between China and the US. We, therefore, expect growth in 2020.
According to a study by Kotak Institutional Equities, the Indian stock market is highly rated despite persistently poor economic conditions. Over the last few months, all the major indicators point to further deterioration of the economic situation. The study also gives the same reasons as some economists argue that the slowdown is partly because of structural factors. A simple monetary and fiscal stimulus cannot be enough to revive the economy.
Although major policy indicators show no signs of improvement in the economy, the broader indices are nearing a peak due to a resumption of profits, which is due to lower corporate tax rates and lower provisions for loan defaults by banks. After the lowering of the tax rate, earnings increased in the second quarter of FY20 and the financial performance indicators in India were positive.
Sentiments and trends are also moving markets upwards as a result of the positive developments in the US-China standoff. As the Ministry of Finance has intervened recently, the market mood has changed. The result is that top stocks of both BSE and NSE have shown a recovery in valuations while lower corporate tax also benefited many blue-chip companies.
The improvement in the quarterly result in September is one of the main reasons for the market recovery. The results for the September quarter were not a complete disappointment as most companies reported comparable or better results. This has also improved the returns on most stocks and consumers are putting additional money in mutual funds. Those considering to ride the markets’ wave should consider Finserv MARKETS which allows you to invest in the best mutual funds directly which saves you fees and commission charged by the brokers, thus delivering higher returns.
The tax cuts had a positive impact on the outcome of the upper tax bracket. The most important positive in the earnings season of the second quarter is that the missed results, even at the operational level (sales and EBITDA), were not above average and, according to experts were largely neutral.
The verdict in the Essar Steel case is very positive for the banks. This judgment should be viewed from a broader perspective as bidders now feel much better and banks are confident that the likelihood of recovery is now high.
The recent steps by the government to relieve telecommunications companies of their inability to pay their dues for another couple of years and the continued efforts to privatize about half a dozen public sector companies could also sustain the markets. Back on the market, experts believe that upside potential is limited and consolidation is likely in the short term.
Pankaj Pandey, Research Director at ICICI Securities, said this is a specific marker for the action. Mid-caps and small caps are behind the index. “This is a specific stock market, so do not expect a general upturn, so far this seems fair as the indications are being met,” he added.
The over-optimistic valuations seen in the market are also being pointed out by the experts. High valuations in the Indian market are supported by a combination of factors, including low domestic and domestic bond yields, expectations for Sino-US trade, expectations of further Indian reforms and Street’s expectations of a strong recovery in the period fiscal year 2020-22.
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