Indian stocks are on a relentless upward trajectory, driven by strong macroeconomic indicators, strong corporate fundamentals and strong inflows into domestic equities, according to a recent UBS report. Despite facing increased volatility due to global challenges, the Indian stock market has reached record highs. Particularly noteworthy is the notable outperformance of small and mid-cap companies (SMID) in recent years.
As the fourth quarter earnings season progresses, early reports indicate an improvement in the quality of earnings growth. Since more than half of the BSE100 companies have reported, there is a noticeable increase in beats as compared to failures. Sectors such as consumer durables, metals and mining, IT, healthcare, automobiles, cement and financials have shown positive surprises in earnings growth, while others such as oil and gas, chemicals and industrials have faced greater disappointments.
Despite global headwinds, domestic mutual funds continue to drive the market, offsetting outflows by foreign portfolio investors. However, UBS recommends caution with SMID companies due to their high valuations. These companies have significantly outperformed large caps in recent years, resulting in large valuation differentials. UBS suggests investors take profits in SMIDs and shift their focus towards large caps, which are relatively better positioned in terms of earnings growth and resilience to higher oil prices.
Looking ahead, UBS maintains a positive outlook on earnings growth, projecting a 12% to 13% rise for FY25. However, amid global uncertainties and the ongoing Indian elections, the Short-term market sentiment may be muted. However, UBS expects any correction to be limited, given the strong macroeconomic backdrop and healthy corporate earnings.
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Identifying key risks for Indian markets, UBS highlights factors such as political instability during elections, possible delays in the US rate cut cycle and geopolitical shocks such as oil price surges. Despite these risks, UBS recommends a strategic focus on sectors linked to the domestic market, such as automobiles, consumer durables, industrial/infrastructure, utilities and real estate, which offer long-term growth prospects supported by stable margins and balance sheets. healthy.
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