Nifty 1% off historic 25k mark: Should you stay put or exit your long positions?

Indian equities in Friday's trade (August 2) were weighed down by negative global cues as sentiment turned sour on economic concerns in the world's most developed economy. Even as the Nifty and Sensex fell sharply in today's trade, Nifty Midcap 100 logged gains and scaled an all-time high, taking year-to-date gains on the index to 27 per cent.

The gains on the index discussed here are primarily led by Oil India, Lupin, HDFC AMC, BSE and Syngene International.

Here's how experts see the trajectory going forth for Nifty and the broader markets:

Mr. Raj Vyas,  Vice President - Research, Teji Mandi remarked that the market has been performing well, and earnings are a key reason behind it. When we discuss the market being at an all-time high, we often forget that earnings are also at an all-time high. From a data point he said four years ago, the profit pool for NSE 500 was just ₹4 lakh crore, but by the end of FY24, it had reached ₹12 lakh crore. That's an almost 32% CAGR. Similarly, NSE 500's market cap CAGR is also around 32%. For the Nifty index, the profit CAGR over the last four years is 26%, and the market cap CAGR is about 28%.

So, when the markets are at an all-time high, corporate earnings are also at an all-time high, GDP is at an all-time high, and we expect a 15-16% CAGR growth in corporate earnings over the next 2-3 years. In short, over time, the market has aligned with corporate earnings.

During the flat market period from FY14 to FY20, the earnings CAGR growth was hardly 5-6%, and the market saw similar growth during that period.

When it comes to valuations, the current P/E ratio for the Nifty is 24.61. The highest P/E recorded was on October 18, 2021, when it was 33.92x. This indicates that, from a valuation perspective, the market is not in an overbought zone. The 10-year average P/E is 23.5x. Over the trailing 12 months, the P/E is 22.6, while the 1-year forward P/E is 20.76, and the 2-year forward P/E is 19.33. During this period, EPS is expected to rise to ₹1,204.57 from the current ₹1,015.84 on a 1-year forward basis. Hence, we expect markets to continue perform well though the next few months we might see some bit of consolidation because of lack of any macro events. With September ending and the start of October month which also markets the beginning of festive seasons and second quarter update, the markets will then try to catch the upward momentum back, he added.

However our philosophy for the market is that it is always better to remain invested rather than time the market because we believe no one is perfect and no one can guarantee you that he/she will be able to generate this much particular % of returns. We say this because when we look at the Nifty's 30-year history, if someone had remained invested for the entire period, their CAGR return would have been 12.2%, resulting in a 31x return. However, if they had missed the best 30 days of the Nifty over those 30 years, that 31x return would have dropped to just 3x. This highlights why it's advisable to stay invested consistently.

G. Chokkalingam, Founder at Equinomics also shared a similar view and said that Sensex and Nifty can continue to rise as their relative valuations are still highly comfortable as compared to small and mid-cap segments (SMCs). Further macro factors are favourable for the broader markets.

Near 7% GDP growth, monsoon becoming surplus now, anticipated rate cuts by the US Fed and the Budget’s focus on fiscal prudence augur well for the continued rally in larger cap segment. In the SMC segment only a small proportion of stocks provide valuation comfort and investors should be highly cautious in this segment.  Comfort on valuation and quality of management and balance sheets are very important at this juncture while investing in Smc segment, advised the expert. Further, according to him overall correction is not happening in the broader markets as huge no of new investors ( who largely focus on Smc stocks) are still pouring into the markets. In fact, already stock specific corrections based on individual valuations already started in the Smc segment and that may continue in short term, he added.

Suman Bannerjee, CIO, Hedonova also held a similar view in respect of the broader markets and said that despite high valuations, the broader markets can still continue to outperform and deliver exceptional returns. Historical instances show that stocks perceived as overvalued can sustain their upward momentum, driven by strong earnings growth and positive investor sentiment. The prevailing narrative, influenced by demand and supply dynamics, plays a crucial role in shaping market trajectories.

Nifty and broader markets outlook

While current valuations may seem stretched, domestic investor flows and a robust macroeconomic environment could sustain the bullish trend. However, the market's future performance remains uncertain and susceptible to exogenous shocks that could alter demand-supply dynamics and valuation perspectives, added Bannerjee.

Experts advise to investors

Vyas said that he believes that it is always better to remain invested rather than time to market because no one is perfect and no one can guarantee you that he/she will be able to generate this much particular % of returns. This is as  when we look at the Nifty's 30-year history, if someone had remained invested for the entire period, their CAGR return would have been 12.2%, resulting in a 31x return. However, if they had missed the best 30 days of the Nifty over those 30 years, that 31x return would have dropped to just 3x. This highlights why it's advisable to stay invested consistently.