Is there any silver lining for the markets amid current turmoil?

The BSE Sensex and the Nifty50 indices rose for the first time in seven days yesterday, as markets looked to stabilise after last week’s blow.

The indices, however, succumbed to the global doom in 2022 amid rising rates and hot inflation. The Nifty is nearing a bear market, having declined 17% from its lifetime peak.

However, when compared with global peers, Indian markets have been resilient. 

According to Motilal Oswal Financial Services, the MSCI India index has gained 7% in the past year whereas the MSCI emerging market index has corrected 22%.

Analysts attribute this outperformance to the unshaken confidence of domestic investors.

DIIs, for instance, have pumped in around 2.15 trillion rupees, so far this year, as against FPI outflow of around 3 trillion rupees.

Naveen Kulkarni, Chief Investment Officer, Axis Securities says DIIs are positive as India has seen high inflation previously. Sticky inflation a challenge for the West, he says. Unexpected rise in inflation in developed markets making FIIs jittery. 

Kulkarni expects equity markets to reverse the current downbeat trend once the global turmoil settles.

Kulkarni says corporate earnings looking strong, and investors are waiting for global events to cool down. Once interest rate hikes settle, focus will shift to domestic front, he says. 

Another silver lining is the attractive market valuation.

At the end of May, the Nifty was at a one-year forward price-to-earnings ratio of 18.7 times, down from 23 times seen in October 2021.

The current valuation is a 4% discount to its 10-year average. 

"Markets often need trigger events to comply with the universal law of mean reversion and the Russia-Ukraine war is one such event this time," says Santosh Meena, Head of Research, Swastika Investmart.

Meena recommends investors lap up stocks with good fundamentals and robust financials, using the buy-on dips strategy.

That said, the risk of inflation continues to shadow near-term prospects.

According to Kotak Institutional Equities, "Peaking of inflation could put a cap on bond yields and a floor on equity valuations. However, if inflation were to surprise on the upside, the already high yield gap may become more negative and likely result in a further correction in market multiples” - Kotak Institutional Equities

Against this backdrop, the markets are likely to continue to be range-bound today given a lack of domestic triggers.