Dalal Street's Bull Run Only At Halfway Mark But Short Correction Awaits

India's bull run is only past the halfway mark but a mix of fundamental and technical factors have Asia's third-largest market poised for a temporary correction, according to Morgan Stanley analysts.

The ongoing record rally will likely see some profit booking in the short run, Ridham Desai, equity strategist at Morgan Stanley, had said in a report on Aug. 3. "A correction will test money in the market and possibly excite money on the sidelines."

India's 50-stock blue-chip gauge—NSE Nifty 50—has risen for 13 straight sessions to post the longest winning streak since the launch of the index in 1996. Both Nifty and the 30-stock Sensex hover around life highs and have risen by 4.17% and 4.36% since Aug. 14 this year.

Valuation is never the sole reason for stocks to correct, but might be a catalyst when other fundamental and sentiment events unfold, the brokerage said. A potential growth slowdown for the first time since Covid-19 and the state-level spending splurge are the two fundamental risks to the ongoing bull run.

The possibility of retail money shifts to the primary market and a sharp sell-off outside India, especially in the US, could be two technical risks to monitor, the note said.

Despite all the current concerns, India's stocks "continue to climb the wall of worry, leaving many professional investors perplexed," Desai said. The bull market is still not at its peak as the expected confluence of excess leverage, profits, prices, valuations and sentiment is still not seen yet.

India's benchmark indices—the NSE Nifty 50 and the S&P BSE Sensex—have risen 16.3% and 14.2% respectively so far this year, making them the fifth and seventh best-performing Asian indices.

The mid-cap benchmark is valued over Nifty 50 and the small-cap stocks continue to gain more despite froth concerns. The price-to-earnings ratio of the Nifty is valued at 24.4, while that of the small-cap and the mid-cap index is at 33.6 and 45.8, respectively.

The next leg of the bull market is expected to come from earnings growth fueled by private borrowing and spending, the note said. "We see a structural rise in equity holdings on household balance sheets being supplemented by higher global allocations to Indian stocks reflecting India’s rising index weight."

The brokerage prefers cyclicals stocks over defensive stocks and large-caps. It is 'overweight' on financials, technology, consumer discretionary and industrials, while being 'underweight' on other sectors.