‘Markets have priced in most of the good news’

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Subscribe to enjoy similar stories. The Nifty has rallied 16% year-to-date (YTD), but significant gains from here on could be unlikely over the next 12 months, with most of the good news, be it on economic growth, falling inflation and potential interest rate cuts already priced in, believes R. Venkataraman, chairman of IIFL Securities.

Low crude oil prices would favour oil marketing companies (OMCs) while rate cuts could support non-banking financial companies (NBFCs) but with the capex cycle yet to pick up, he advises caution on capital goods firms. Edited excerpts: Markets have surged significantly this year, with the Nifty up 16% YTD and the S&P up 17%. In India, optimism is fuelled by potential rate cuts, falling inflation, strong gross domestic product (GDP) growth in FY24, and political stability.

However, looking ahead, we don't expect significant gains over the next 12 months. The Nifty may deliver high single-digit returns in our base case, but with rate cuts already priced in, a sharper rally (from hereon) seems unlikely. That said, softening commodity prices due to weak global demand could boost earnings for Indian companies, with Nifty earnings potentially growing by 10-11% over FY24-26.

Despite slow profit after tax (PAT) growth in Q1, sales growth was strong, though there were variations across sectors. Small and mid-caps have been leading due to higher earnings growth, with the NSE Midcap and Small cap indices trading at very high valuations 33x and 22x 12-month forward earnings, respectively. Only high earnings growth going forward can justify these valuations.