There is a lot of chatter on social media about the fall in the equity markets in India. There are estimates galore about the amount of wealth eroded due to this sell-off. Nithin Kamath of Zerodha has articulated that trading volumes have slumped across categories. That could mean lower commissions for brokers and lower securities transaction tax for the government. Foreign portfolio investors sold about $40 bn worth of Indian shares in six months, and worries about US trade relations are offered as explanations for the fall.
You may want to note that expectations of tomorrow’s profits influence share prices. The way the above factors affect Indian shares needs to be understood well.
The International Monetary Fund (IMF) put out a report on India’s macro fundamentals last week. The global institution expects India’s economy to grow steadily over the next few years. “Real GDP is expected to grow at 6.5% in 2024/25 and 2025/26, supported by robust growth in private consumption on the back of sustained macroeconomic and financial stability,” said the institution in its latest review of the Indian economy.
Businesses need such macroeconomic and financial stability besides growth. That means companies riding on that economic growth will continue to grow profits. The market thumb rule is that profits grow more than twice that rate.
With a correction in share prices, companies that generate business and profits riding on India’s economic growth and consumption are likely to get attractive. According to one media report, several large-cap companies are trading at a valuation last seen before the pandemic in 2020. However, many mid-cap to small-cap companies trade at a multiple that is much higher than five years ago despite the current sell-off.
The sell-off will likely continue in richly valued companies as investors are unlikely to give that high premium they once enjoyed. There is a reason for that. Foreign investors have other options. They have quality businesses trading at a discount to their fundamentals in markets like the US, China and other countries. Expect foreigners to continue to sell Indian equities and Indian domestic mutual funds to pick up shares at lower levels.
That may not be such a bad thing. Price-to-earnings ratios of 80 to 100 are difficult to justify forever. Those levels show expectations of profit growth were sky-high. A stock market phase where share prices are catching up with profit growth is better for investors than the one where profits are trying to meet expectations. If share prices fall due to a sustained sell-off by foreigners but profit growth remains the same, market valuations can go from overpriced to attractive.
You must know the sectors affected by global trade issues and US economic growth. India’s exports to the US are relatively lower than those of China, Mexico, and Canada. Any trade war would hurt export-centric businesses in these countries first. There is a reaction in the IT services sector stocks. That is visible in the sharp fall in the Nifty IT index. You may want to carefully listen to company managements on the US market outlook in April 2025.
Stay Calm
It is usually not the advice you heed when things are volatile. However, you need to figure out a way to stay calm. If you are trading in the stock market by borrowing, you may want to unwind your positions and pay off these loans. However, you must not rush to pull out your money if you are a long-term investor. A conversation with your financial advisor can help you calm your nerves. If you are confident about your future income and are a long-term investor, you should look at the correction in the stock market as an opportunity.