Investors need to have a balanced approach this year

livemint.com:

Growth and potential: India’s economic growth story is compelling. Its GDP has grown at a steady more than 7% in US dollar terms, outpacing most countries. This growth translates to strong corporate earnings, with Nifty 50 firms posting 22% profit growth over the past 3 years in compound annual growth rate terms.

Several factors contribute to this success. Benign monetary policy has kept interest rates stable, fostering investment and growth. A revitalized banking sector with robust lending capacity supports consumption and investment.

Additionally, corporate India has significantly de-leveraged, improving its financial health and paving the way for further expansion. Headwinds and risks: Despite its positive outlook, India faces several challenges. A fractured global growth picture presents headwinds, with many economies experiencing sluggishness and rising interest rates.

This could dampen Indian exports and overall economic activity. India’s market cap has now surpassed $4.1 trillion and is now 120% of GDP. This is far beyond the recent highs that this ratio made.

We are getting into unchartered territory. Valuations have also trended higher with trailing 12-month Nifty P/E ratio now above 22 times. Historically, such valuations lead to lower returns in the future.

Earnings growth has been a key pillar of support for the markets. Aided by strong economic growth, record margins and stable monetary policy earnings have trended higher and has seen very few downgrades which is break from the past. This augurs well for the long term if the earnings trajectory can withstand the softer growth trajectory for the next few quarters.