– By HDFC Asset Management Company Limited
With the continuation of the market fall in November, frontline Indian equity indices such as the NIFTY 50 Index (TRI) are down ~10% from the recent high of September 26, 2024. A host of factors seem to be driving it, including flows related (aggressive FPI selling, large IPO / FPO activity), and fundamentals related (some disappointment in corporate earnings in Q2FY25). A key reason for the growth slowdown is being reported as the slowdown in government spending, which could reverse significantly in the second half of Financial year 2025 (H2FY25). In this note, we try to assess the dynamics of the market fall to see where opportunity could lie (Hint: Largecaps).
Amongst size classes, largecaps, midcaps and smallcaps have seen similar falls at the headline level, ~11% from their respective highs. While the correction gives an overall valuation comfort, the almost equal fall across market caps means that the valuation gap that was seen amongst the different size classes remain, with midcaps and smallcaps trading at relative premiums to largecaps and their own history.
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Among sectors, there is some divergence, with sectors leading the fall being the ones that saw the largest increase in their levels in the recent few months / years.
In the current earnings season, a large number of companies reported results that were worse than analyst expectations. This led analysts to further reduce their estimates of earnings growth. In fact, despite this reduction, overall medium term profit growth estimates remain healthy across market segments. As seen in actual earnings growth in the past few years, expected earnings growth is higher in midcaps and smallcaps.
Government spending in FY25 so far has been slower than the previous year, being only 43.8% of total budgeted expenditure by September, vs 47% last year, with spending being particularly slow on the capital expenditure front (down by 15% YoY in Apr-Sep). This has been ascribed to reasons such as the union elections and large state elections, irregular weather patterns in certain areas, etc. A simple analysis of the budget numbers suggests that to meet the expenditure numbers mentioned in the Budget document released in July 2024,
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