New Delhi [India], August 21 : The Indian stock markets have outperformed emerging markets over the past 18 months due to strong domestic flows and healthy earnings, says a report by Dolat Capital.
However, it underscores the fact that the extent of outperformance seen may not be sustainable in the long run because of the upcoming macroeconomic decisions in the US.
It added that the US macroeconomic data could limit further increases in valuations.
"We also believe that the US macro data will keep a lid on the significant uptick on valuations from here on and till the end of this CY," the report of Dolat Capital added.
The impact on equities will depend on whether the US economy experiences a soft or hard landing.
Optimistic about the consumption revival in India, the report added that there is a focus on rural consumption recovery, with expectations of a positive turnaround amid concerns like food inflation.
"We revisit our bias on consumption recovery led by the rural doing better vs urban. We maintain that these factors will eventually wear off in the backdrop of a good monsoon and seasonality-led surge for the food basket. Commentary from FMCG players, as well as other consumption categories, supports the turnaround view on rural." the report added.
The revival in monsoon and seasonal factors is expected to boost the food basket, potentially improve rural spending. The monsoon season this year has been far better as compared with last year and it will be a booster to agri income and spending sentiment
"We also observe that the inflationary expectations have showed signs of topping out. While the near term risk to this view of ours stems from the food inflation uptick of late but we read it as seasonal than else. Eventually we expect it to taper off and start normalizing, signs of this are evident in the July data." Said the report
The report also mentions the employment schemes announced by the government in the July budget and term it as "job boosting measures." Five new schemes were launched as part of Prime Minister's package to promote employment opportunities for youths. The budget has provided for Rs 2 lakh crore to create over 4.1 crore job opportunities over a five-year period.
"The Budget presented seems to take specific steps towards job creation. In the latest budget, the FM highlighted the need for creating more jobs in the formal sectors through employment-linked incentives (ELI). She sought to do this through three schemes based upon EPFO enrolment. The focus was on financially supporting first-time employees and their employers, " it added.
Talking about the portfolio strategy, the report said that preferred investments are shifting towards rural consumption, discretionary sectors (favouring durables over autos), selective pharma stocks, CNG plays in the energy sector, and chemicals as a structural turnaround story.
"We remain aligned to ride the earnings cycle which we believe has strength and triggers to ride through the FY25 and FY26 based on current environment," the report mentioned.
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