Tuesday's Talking Points
Is the Market Correction an entry opportunity?
What’s the Point?
With the continuation of the market fall in November, frontline Indian equity indices such as the NIFTY 50 Index (TRI) are down ~10% from the recent high of September 26, 2024. A host of factors seem to be driving it, including flows related (aggressive FPI selling, large IPO / FPO activity), and fundamentals related (some disappointment in corporate earnings in Q2FY25). A key reason for the growth slowdown is being reported as the slowdown in government spending, which could reverse significantly in the second half of Financial year 2025 (H2FY25). In this note, we try to assess the dynamics of the market fall to see where opportunity could lie (Hint: Largecaps).
Market rise was broad based, fall has been more uniform
Amongst size classes, largecaps, midcaps and smallcaps have seen similar falls at the headline level, ~11% from their respective highs. While the correction gives an overall valuation comfort, the almost equal fall across market caps means that the valuation gap that was seen amongst the different size classes remain, with midcaps and smallcaps trading at relative premiums to largecaps and their own history.
Among sectors, there is some divergence, with sectors leading the fall being the ones that saw the largest increase in their levels in the recent few months / years.
Chart: Recent market fall has been relatively uniform – across size and sectors!
Source: Bloomberg. Note: Data as on end of 18-Nov-2024
Earnings Growth Expectations remain healthy across size classes and sectors
In the current earnings season, a large number of companies reported results that were worse than analyst expectations. This led analysts to further reduce their estimates of earnings growth. In fact, despite this reduction, overall medium term profit growth estimates remain healthy across market segments. As seen in actual earnings growth in the past few years, expected earnings growth is higher in midcaps and smallcaps.
Chart: Historical Earnings Growth remains healthy, lends comfort
Source: Bloomberg. Note: Historical earnings growth refers to growth in trailing 12M EPS of respective indices between Sep-19 and Sep-24
Revival in government spending in H2FY25?
Government spending in FY25 so far has been slower than the previous year, being only 43.8% of total budgeted expenditure by September, vs 47% last year, with spending being particularly slow on the capital expenditure front (down by 15% YoY in Apr-Sep). This has been ascribed to reasons such as the union elections and large state elections, irregular weather patterns in certain areas, etc. A simple analysis of the budget numbers suggests that to meet the expenditure numbers mentioned in the Budget document released in July 2024, the central government will have to spend at a significantly higher rate, which could be ~17% higher YoY for the rest of the year.
Table: Math on Union Government Spending
Source: Budget documents
Government spending slowdown is a potential cause for slowdown in aggregate economic growth, as well slowdown in consumption. A reversal in H2FY25 could have a positive impact on the economy and corporate revenues.
Indian Equities – Fundamentals remain strong
Our medium to long term positive outlook on Indian equities remains unchanged driven by the structurally robust domestic growth outlook, healthy corporate profitability, and supportive pro-growth policies. India remains amongst the fastest growing major economies as per IMF forecasts. Near-term risks include escalation in geopolitical tensions, slowdown in government's reforms momentum, weakness in global growth, etc. Some of the geopolitical unknowns have now moved to the known unknown territory, and are therefore possibly priced in already.
While valuations have improved post the recent correction, they are still at a premium to their historical averages. With the fall being almost equal across size classes, valuation premiums for midcaps and smallcaps versus largecaps remains largely unchanged. As mentioned in our Insights document from July 2024, FPI selling could abate / reverse, and largecaps could be well placed in such a scenario. In fact, in the note titled “Bull Market Corrections…”, we highlight how FPI linked sell-offs could be an opportunity to increase allocations to equities as an asset class.
To conclude, one should keep in mind that asset allocation drives portfolio returns, and staying invested for the long term is paramount. Periods of volatility tend to improve the Rupee cost averaging benefit from SIPs*.
Sources: Bloomberg, Ministry of Finance, and other publicly available information
*Systematic Investment Plans
About Tuesday’s Talking Points (TTP): TTP is an effort by HDFC AMC to guide key conversations in the Indian financial markets and investing ecosystem. We aspire to do this by providing relevant facts, along with our perspective on the issue at hand. If you have a topic that you would like to be featured here, please write to us at [email protected]
Disclaimer: Views expressed herein, involve known and unknown risks and uncertainties that could cause actual results, performance, or events to differ materially from those expressed or implied herein. Stocks/Sectors/Views referred are illustrative and should not be construed as an investment advice or a research report or a recommendation by HDFC Mutual Fund (“the Fund”) / HDFC Asset Management Company Limited (HDFC AMC) to buy or sell the stock or any other security. The Fund/ HDFC AMC is not indicating or guaranteeing returns on any investments. Past performance may or may not be sustained in the future and is not a guarantee of any future returns. Readers should seek professional advice before taking any investment related decisions.
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