We have done extraordinarily well. What has led to this kind of an outperformance and is this going to sustain?
All good things have to come to an end someday. The March 20 lows of extreme pessimism due to the pandemic, gave way to a bull market. We have seen massive outperformance over the last one and a half-two years and given that base, the economy is firing on all cylinders — 9.5% GDP growth for FY22 will lead to earnings growth for FY22. However, the moot question is how much of that is already priced in, not only for FY22 but for FY23 as well. I think this party can continue for some more time but I would expect some serious correction in the broader market in the next two quarters.
What could lead to that 10-15% correction? Could it be numbers, could it be valuations, could it be macro?
The rally has been driven by massive liquidity in global markets and also shift of investments away from China to other emerging markets. India is clearly a beneficiary so the biggest pull in the market is that of liquidity. One cannot have the markets trading at a premium to the largecaps space. More than 50% of earnings of corporate India come from largecaps. Given that backdrop, the power of retail, which has been pushing the broader markets, has now reached a zenith and is likely to give way once you have some indications of tightening of liquidity not only in Indian markets, but also some hint of that coming through in global markets.
If you hear the commentary coming out of the Fed, whatever is happening in China on energy prices and power crunch, for the first time, we are seeing some serious inflationary weapons kick up in the US. Of course, the US is the driver of global liquidity. If there is any indication, Fed chair Powell this time around seemed a bit jittery as to the timing of the taper.
Given whatever we are seeing in China and the US — the two largest economies of the world — I would reckon that taper is coming in far sooner than what the markets are prepared for at this point of time. That would be the biggest driving force and of course inertia and momentum from the retail which has continued for the last one and a half-two years at the maximum pace is likely to face some serious headwinds.
The Tata Group of companies have gone through this real purple patch. The entire rerating in Tata Group of companies from Tata Consumer to Tata Steel, from TCS to Tata Communication, Tata Elxsi have been huge wealth creators. Right now, more than fundamentals it is the prefix Tata which seems to be driving some of these stocks?
Chandra has been acting real time to push all economies to digital and that is where the hyper goal in terms of top line growth and bottom line growth lies. It is manifesting itself in superior growth for almost all Tata Companies — be it the staples, the durables or the digital. The talk about the super app integrating all the various businesses into a single platform is leading to the rerating. Added to that, bits and pieces of increase in stake by Tata Group of companies is boosting that confidence.
The build up in Tata Group of companies is likely to continue given that apart from jitters in Tata Motors, almost all of their businesses are firing on all cylinders and the outlook on growth remains pretty robust. One may argue that some of these valuations that Tata companies have are slightly on the limited side but these elevated valuations would likely to continue on some of these names. They are acting in cohesion leading to earnings growth for almost all Tata Group of companies; rerating is following and stake pick up by the management is only leading to that confidence. It still has some legs to go on the upside.
