The week saw the return of FIIs as buyers in the equity market. This was completely unexpected. The resulting outcome saw a revival in the quality trade. Stocks which were already trading at reasonably high valuations were favoured, given the lower expectations set by analysts. By setting lower expectations, the markets reacted to the results positively as the results beat expectations. We saw this in several expensive stocks. These stocks rallied significantly in relief. The coming week will see more results and reactions.
While the markets have resigned to lower margins, softer profit growth and inflation-led sales growth, the markets still think the current valuations may be justifiable in the future. The premise is that as inflation falls, companies will be able to recoup their profit margins, sustain their growth performance, and generate higher returns. Clearly, the Indian markets are showing optimism for which there is no ready evidence of translation.
The global markets have been sharper in repricing stocks and resetting expectations. The Indian markets seem to be anchored to the recent trends of the equity market. This leads to valuation excess in several parts of the market where exuberance was witnessed post COVID. The markets are in no hurry to mark down PE ratios, reset expectations and revalue businesses.
Interestingly in the private equity space, this derating is happening at a rapid pace. Companies are also raising equity at lower valuations. The secondary market seems to be in no such hurry. The coming weeks will show how this divergence in behaviour between private equity and secondary markets plays out. The markets are poised to weather a phase of mixed corporate results from companies.
