Nifty tops global markets in 2017

Rallies 26.5% in dollar terms, beating all major developed markets

Despite falling more than 2 per cent in August, the outperformance of the Indian market vis-à-vis other major developed and emerging continues. In 2017 so far, the benchmark Nifty has gained 26.5 per cent in dollar terms – the highest by any major benchmark index globally.

While India had lost the number one spot to South Korea in June and July, a larger correction in the Korean market on account of escalation in the US-North Korea tensions has tilted the scales back in India’s favour. In the past one month, the Nifty has fallen 1.15 per cent, while the Korean market has posted a drop of 5.1 per cent.

Market participants say this stability in Indian markets, despite weak global cues, is due to strong domestic fund buying, which provides a counterweight to any exits by foreign funds.

“The macro fundamentals of the Indian markets are solid and will continue to remain so. Impressive inflows into domestic mutual funds are also a huge asset as they provide the much-needed liquidity in the market and also act as a counterbalance to foreign funds,” said Raamdeo Agrawal, joint managing director, Motilal Oswal Financial Services. 

Agrawal added that there could be short-term hiccups in the markets, but from a long-term perspective Indian markets would continue to remain attractive.

While emerging markets (EMs) as an asset class have yielded superior returns this year, India is expected to be a bright spot within the EMs. Analysts say India offers stability and growth potential whereas other EMs are reeling under some issue or the other. Geopolitical tensions could be a huge concern for South Korean markets. On the other hand, other EMs, such as Brazil and South Africa, are currently seeing political uncertainty.

However, the recovery of corporate earnings is expected to be the biggest concern for the Indian markets, according to experts. The valuations of Indian stocks have soared in the past few months in anticipation of better corporate earnings. 

The Nifty is currently trading at 19.6 times the forward 12-month price to earnings (P/E) multiple, which is the highest for any major benchmark index globally. Although India has always commanded premium valuations, experts say the current valuation levels are about 10-20 per cent higher than long-term averages.

“Given the current slowdown in industrial activity and credit growth, it would be naive to expect sustained earnings recovery in the short-term. However, the global earnings revision picture, especially in the developed world, appears relatively better, which gives confidence that India should catch up on upward earnings revision with a lag,” said Vinod Karki, vice-president (strategy), ICICI Securities.

The strong domestic buying is also expected to get good support from foreign portfolio investors (FPIs) who have been net buyers across the EMs to a tune of $60 billion this year. In India, FPIs have bought shares worth Rs 48,640 crore ($7.6 billion). On the other hand, domestic mutual funds have been net buyers of equities to the tune of Rs 52,000 crore in the first seven months of the current calendar year.

The superior performance by the Nifty in 2017 has largely been driven by a sharp spurt in some of the index heavyweights including Reliance Industries (RIL), ITC, HDFC and HDFC Bank. Shares of RIL and HDFC Bank are up nearly 45 per cent so far this year. On the other hand, the share price of ITC, the single largest company in the Nifty in terms of weightage, has gained 17 per cent in 2017. 

However, technology and pharma stocks have been the biggest drag due to changing global scenarios.