India is currently in a bull market but has not reached the bubble phase yet, according to DAM Capital Advisors' Nandan Chakraborty.
"When the bull market is on, you have to be very exclusive in what you pick, as when the bull market ends, it becomes a bubble," Chakraborty, head of strategy at DAM Capital, told BQ Prime.
It is exactly like the "Tiger Bird, a colloquial name for the Indian Rufous Treepie. It synergistically picks the tiger’s teeth after the tiger eats. The tiger opens its mouth wide open (bull market) as the bird ekes out luscious morsels quickly before the tiger can close its mouth (bubble market)", a report by DAM Capital Advisors said.
While benchmark Nifty 50 has rallied 9% so far this year, small and mid-cap indices have surged about 28%. And Indian stocks are trading at pricier valuations than Asian peers.
Bull Market
Quantitative factors, including valuations, momentum indicators, and the fear factor, show that India is currently in a bull phase, according to Chakraborty.
"You are still in a phase where, even though you are pretty high in terms of valuations, you are below the norms for relative valuation compared to your own history," Chakraborty said. "Compared to the last four bubbles, we are nowhere near the same level of overvaluation as we were then in these factors."
Besides these three factors, an additional factor was the 'narrowing of the rally', Chakraborty said.
There has been no discernible pattern in stock movements or sector trends over the past month or so. "All sectors are freaking out, and when you look at these sectors, there is no commonality either. All sorts of sectors are moving up every other day," he said.
What To Watch
FPI flows are key monitorable, according to Chakraborty, and two key components that impact foreign flows are the US Fed rates and the China stimulus.
Another monitorable factor is the systematic investment plan, or SIP, slowdown, he said. "SIPs today are two times the net mutual fund inflows and 45% of the gross MF inflows. Plus, you have portfolio management services, which account for about 27% of the MF inflows, so a huge part is retail," he said.
El Nino and the results of the four major state elections would also impact the market, Chakraborty said.
Mid-Cap Rally
"It is obvious that mid caps are overvalued by any measure," said Chakraborty. "Mid caps are now the single largest part of mutual fund AUMs."
The mid caps will not crash; however, they might take a pause because, while the FY25 earnings take off, the FY24 earnings are not as good, he said.
The mid caps can go under in one of two conditions: either if there is a GDP surprise or if there is a severe discount, Chakraborty said.
"I think the mid caps will take a breather, as large caps in banking, auto, etc. start freaking out," he said. Since the bull market is currently on, the large caps will do better, he said.
Mid-cap earnings growth could take off in FY25, driven by logistics, FMCG, cement, durables, consumer services, media, and textiles, Chakraborty said.
Watch the full interview here:
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