As domestic stock indices scaled new lifetime highs recently, the event was not marked by the usual hype and hoopla. This is perhaps because the journey to this high was neither exuberant nor broad-based. After charting a vertical climb from the Covid lows of March 2020 to the peak in end-2021, Indian indices spent much of the past year in rangebound moves. This prolonged period of volatility has helped dissipate the froth that was evident in segments such as IPOs, where new-age companies were raising money at exorbitant valuations, and also sort out dubious micro-caps. The recent rally has been selective with just 5 per cent of the large-cap stocks reclaiming record highs, while most mid- and small-caps are still 20-50 per cent below their 2021 peaks.  

Four factors offer room for optimism that this bull run will prove more sustainable than the preceding one. For one, unlike the Covid rally, the ongoing bull run has been backed by improving fundamentals of the economy and India Inc. GDP numbers for the last two quarters have shown key engines of the economy recouping all of the ground lost during Covid. This economic rebound has seen consolidated earnings per share of Nifty50 companies more than double from ₹385 in June 2020 to nearly ₹800 now. In the five years from 2014 to 2019, earnings of these companies had expanded barely 6 per cent. Two, sectors such as banking which make up a significant chunk of the listed space seem to be a sweet spot, with a new credit cycle just taking off. Three, earnings catch-up has levelled Nifty50 valuation from a pricey 33 times trailing earnings in end-2021 to 23 times now. While a trailing PE of 23 and 1-year forward PE of 19 are not cheap, they are close to long-term averages of about 20 and 18 respectively. Four, even as strong domestic flows from retail investors and institutions have set a floor to market corrections, November has seen Foreign Portfolio Investors (FPIs) who were on a selling spree until October, return with net purchases of over ₹31,000 crore. The rupee’s relative strength, problems in rival markets such as China and a growing global consensus that India could offer a bright spark in a recession-bound world, seem to have prompted global investors to re-assess their India weights.  

The fact that the recent rally has been fundamentals-backed however, does not mean investors can throw caution to the winds. The Nifty’s forward PE of 19 times is predicated on companies delivering a 21 per cent profit growth next fiscal. This would require them to manage margin pressures that dented profitability in the July-September quarter. With the US Fed on a tightening spree and yet to embark on the unwinding of its mega balance sheet, the erratic FPI flows India witnessed in the past year may only be a taste of the real turbulence to come. While long-term retail investors taking the SIP route may not have much to fear from any upcoming volatility, those dabbling in risky segments such as derivatives may be fishing in troubled waters.