High likelihood of correction in equity markets over next few months

Chennai, July 30

Over the next few months, the chances of the Indian equity market undergoing a correction are high, said a senior official of credit rating agency Acuite Ratings & Research.

Going forward, the market may see sector specific momentum depending on factors like global demand and uptick in private sector investments, he added.

To a query whether the uptrend in the Indian stock markets would continue or come to an end, Suman Chowdhury, Chief Economist and Head --Research told IANS: “The Nifty (NSE 50 index) has yielded a return of 77.4 per cent over the last three years and even if one excludes the impact of the recovery from the pandemic, the one year return on Nifty is at 14.5 per cent.”

This is higher than the returns in the developed markets for example, the S&P500 has a three year and one year return of 40.1 per cent and 10.9 per cent respectively, he said.

According to him, the superior performance of the Indian equity markets so far has been due to the domestic demand resilience, macroeconomic and financial system stability, the increased participation of domestic retail investors and the gradual return of the foreign investors in the current calendar year.

“With the strength of domestic demand along with the pent-up demand for services, well supported by the step-up in the public investments in infrastructure, India’s GDP growth stood strong at 7.2 per cent in FY23,” Chowdhury remarked.

While the medium to long term growth prospects for India will remain robust, the gross domestic product (GDP) growth will moderate to 6 per cent in FY24 given the global slowdown and some lagged impact of higher interest rates on the economy, Chowdhury said.

“There are also potential risks emerging from a resurgence in oil prices and a surge in the food prices in certain categories which can reverse the gradual downtrend in the headline inflation and make the interest rates stay higher for a longer period. Further, there is also some element of political uncertainty that is associated with the upcoming general elections next year,” he added.

Indian companies have seen a strong earnings growth over the last three years driven by the recovery in demand and also the softness in commodity prices.

With the normalisation in demand and no further benefit from lower commodity, sustaining a high earnings growth will be a challenge for the corporate sector in FY24. While the average price to earnings for Nifty has moderated, it is still high at around 24, he said.

“Given such a scenario, the likelihood of a correction in the equity markets over the next few months is high. Nevertheless, the market may witness sector specific momentum going forward depending on factors like global demand and uptick in private sector investments,” Chowdhury concluded.