When markets looked overvalued, investors were concerned about their portfolio valuations. They urgently needed data that provided adequate comfort and allowed them to own and invest further. When investors worried that the economy may not support higher stock valuations for much longer, the urgency to ensure that they had adequate comfort became acute.
The Indian markets have been experiencing that sense of urgency for a while. On the one hand, markets have been unsure about headline valuations. Meanwhile investors have poured liquidity into the more expensive parts of the market. The IPO boom has confidently expanded to support IPOs of more expensive companies at elevated business valuations. Hope and risk-taking have been acting in tandem on the belief that the economy will support businesses by bringing adequate growth back.
The past few months have seen the headline indices testing all-time highs. Meanwhile, the small cap indices struggled despite having record inflows this year. The midcap indices have been holding strong for quite some time and showing confidence which looks seemingly unshakeable.
It was in this scenario that we saw the Nifty 50 getting ready to break out of the all-time high recorded over a year earlier. This surprised many market watchers, given the soft Q2 growth of Nifty 50 companies in both sales and profits. While people were comfortable with the midcap valuations, the large-cap valuations did not provide enough confidence to many market watchers.
The latest economic data has now shown that the market possibly sensed better GDP numbers and was preparing for an upgrade in growth predictions. The stunning 8.2% GDP growth in Q2 has proved the market right. Manufacturing, financials, farming, and consumption show strong growth. While these are early days, these sectors may be heading into a sustained growth phase. With more reforms on the way, the GST cuts, lower interest rates, ample credit availability, and benign inflation, our macros could not be more supportive to the market.
What now remains as an overhang is the Indo-US trade deal and potential risks to global sentiment. The Indian market has shown remarkable maturity in gradually climbing its wall of worry and reaching its all-time high, with better clarity supported by economic visibility. Clearly, the market would now like to believe much more in the economy than it did in the past. Investors may need to reposition themselves for the fast change in market moods.