In earlier times the expectation was that the Indian economy would improve. This time we are already in an economy which is performing well and is expected to do even better in the future. The rising GDP, expected to be around 6.5 for FY24, positions it amongst the faster growing countries in the world. Alongside the economy’s growth, pride among Indians is also increasing. Many expect the present BJP dispensation to be re-elected for the third consecutive term. 

It is no longer a question of who will win the elections; as far as investors are concerned the debate revolves around how many seats Narendra Modi and his team win and what the margin of the victory will be. The market is also expecting a continuation of the ruling party’s policy with more emphasis on sustainable growth and how to make India a manufacturing hub for the world. 

Beyond the factors contributing to the bull rally, two major issues linger among sections of investors: how long will the bull run sustain and should one enter at these levels or book profits? 

The P/E factor

Given that markets move ahead of fundamentals, expectations often tend to eclipse reality. The current market levels are not inexpensive. The P/E ratio, a widely tracked measure to monitor markets, is high. Towards the end of December, when the Sensex reached 72,240 the P/E ratio for BSE 30 shares was a little under 25 – 24.93 to be precise. This marked the highest level for 12 months. In January 2023, the Sensex was at 59,550 and the P/E was 23.28. The P/E had risen to 24.93 in July. July and December have witnessed the peak values of the Sensex in relation to earlier months. 

The P/E of the BSE 500, which covers more than 90 per cent of companies by market cap, was 25.3x in December 2023 compared to 22.72x. While a high P/E is certainly a cause for concern, as it signifies high expectations, it is not a red signal in itself. A high P/E indicates heightened expectations that the company will continue to perform better.

If the growth in corporate earnings is generally in line with expectations, the P/E will likely revert to the mean level. P/E levels did drop in October and November, even though the Sensex remained around 63,000-65,000. This was largely due to quarterly corporate results meeting expectations. The question now is whether the next set of results, for December-end and March-end, will be able to meet expectations.

As anticipated, the IT industry is unlikely to post significant profit growth, leading to a decline in the prices of IT shares. However, there is no real sell-off witnessed in these stocks, as investors believe that a challenging year or two is unlikely to have a grave impact on the overall scheme of things. Holding onto these shares at current levels may make sense.

Oil and gas and FMCG are the two other large constituents of the Sensex, accounting for roughly 11 per cent and 9 per cent respectively. Given that consumption forms a major part of the Indian economy, and given the growing trend of premiumisation, consumer facing companies, including FMCG, will do well. India has the advantage of having many sectors, allowing for resilience even if a few of them are underperforming at a particular point in time.

Sector rotation is always possible in any kind of market. For example, one could choose between automobiles and commodities if one or the other is not performing as expected. In a growing economy like India steel, aluminium and cement will always be in demand, as will several other companies in the manufacturing and infrastructure space. 

Infrastructure

If the aim is to make India a partner of choice for manufactured goods, the country will require significant infrastructure build-up. Currently, the government is the largest capital expenditure (capex) spender in the country, with funds pouring in from increased GST and other taxes. India boasts one of the largest road networks among major countries, with a total length of 66.71 lakh km, comprising National Highways, State Highways, and other roads.

Since 2014, National Highways have seen substantial expansion from around 91,000 km to nearly 1.5 lakh km. Apart from highways, investments are flowing into various other segments, including railways, ports, and airports, to enhance connectivity. Numerous new trains have been introduced as part of this initiative. Investors often avoid companies directly involved in project execution, citing lengthy project timelines and frequent deadline overshooting.

However, a prudent approach is to invest in companies overseeing the execution, such as those involved in design, construction, and contracting. This strategy also holds true for the realty sector. Except for a few companies involved in end-to-end execution, it makes sense to invest in proxy companies like tile manufacturers, sanitaryware makers, and cement companies. Investors have recognised this trend, leading to increased interest in EPC (Engineering, Procurement, and Construction) companies like L&T, whose shares have surged 2x, 3x, to 4x over the last year.

Should one consider investing in such companies? One argument suggests that these companies, listed in the last 2, 3, or 4 years, were initially under-researched and are now being correctly priced. While it might be challenging to find low-hanging fruit in the midst of a bull run, one can patiently wait for corrections to gain exposure to such companies. Intermittent corrections are expected in any rally. The interim budget could trigger one such correction, as traders hype sentiments despite knowing that no major announcements can be made in an election year.

Another scenario could involve profit-taking post the announcement of actual results or during the formation of the new government. Traders who entered early might seize the opportunity to book profits and wait for a few sessions before the pre-budget rally, expected in July, starts again. Investors should use such correction periods to reshuffle their portfolios and move towards more quality stocks.

Business India, which has witnessed many such rallies and dips over the last four decades, is of the opinion that the economy is in fine fettle. Corporate results are expected to be positive. While disappointments may occur for various reasons, in an election year, the rally is unlikely to lose momentum quickly. Although the chances of the ruling party losing elections are slim, there is always that probability. Overextending oneself by taking loans is unwise.

Exiting investments during such times might be unwise unless one is reshuffling the portfolio to move into better quality stocks. Instead of trying to enter newer small-cap stocks during a bull rally, where many traders aggressively promote such stocks, it makes sense to stick to large-cap stocks. While opportunities exist for gains in small caps during a bull run, the risks are higher, with several traders pushing potentially risky stocks, often citing reasons like takeovers by companies from large corporate houses.