Is it too early to call out a bull market peak?

While India’s broader markets havefulfilled the condition of entering a bull market from March 2023 lows, or even year-to-date ( YTD), the benchmark index NIFTY50 is up by only a modest  per cent, which in no way qualifies as a bull market frenzy and indicates rational behavior, noted a report by ICICI Securities. 

“Going by past evidence and assuming Indian markets are entering into a bull phase, there is scope for markets to remain buoyant given the robust macro environment. However, the expected returns will most likely be muted from current levels, especially for the broader markets,” cautioned Vinod Karki, analyst at ICICI Securities. 

Assuming a bull market environment, key indices have scope to remain buoyant going forward – if the past is any indication (1-yr absolute rolling returns)

NIFTY50 index is consolidating just below the 20,000 mark after rallying 14 per cent from March 23 lows as earnings expansion catch up.  However, bull market frenzy is visible in the mid, small and micro-cap indices, which have risen 25%, 29% and 42% respectively from Mar’23 lows. 

Earnings yield spread of mid-caps, small-caps and micro-caps to large-caps getting into unattractive zone which will likely result in muted returns ahead

Note: Large-cap – top 100 companies by market-cap rank, mid-caps – next 150 companies (101-250th rank), small-cap companies – next 250 companies (251 to 500th rank), and micro-caps – next 500 companies. Above chart refers to trailing earnings yield spreads of mid-, small- and micro-caps over large-caps at each point in time. Only profitable companies are considered in the calculations.

Source: Bloomberg, Capitaline, I-Sec research

 Earnings yield (%) at key points in time vs long-term average

“Technically, a more than 20% upside indicates a bull market. Earnings yield spread of mid- and small-caps over large-caps evaporates to zero while it contracts significantly for micro-caps to 70bps, indicating extremely low risk aversion. Economic environment remains favourable as indicated by high-frequency macro indicators (capex, GST collections, PMI, credit growth, etc.),” noted Niraj Karnani of ICICI Securities. 

Why domestic macros appear robust

Capex indicators: Central and state capex YoY growth picked up by a significant 59% (Rs 2.8 trillion vs Rs 1.8 trillion) and 63% ( Rs 1 trillion vs Rs 0.6t trillion) respectively in FY24 so far. Real estate demand continues to be robust driven by demand for higher-end products.

Core sector and credit growth improving: Core sector growth for Jun’23 was 8.2% YoY and fortnightly non-food credit growth as of 14th July’23 was 20.4% YoY (adjusting for HDFC Ltd merger, it is 15.1%).

 Strong manufacturing & services: PMI-Manufacturing at 57.7 and PMI Services at 62.3 for Jul’23 are strong, and so are GST collections at Rs 1.65 trillion for the same month (11% YoY).

 Automotive wholesale: Amidst seasonal weakness, wholesale volumes sail through smoothly with CVs showing strength and PVs and 2Ws holding steady.

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