India’s stock market has been under pressure for the past six months, grappling with ongoing economic and geopolitical uncertainties. The market has seen a significant correction, with the Nifty PE ratio falling from 21.3x to 18.1x since September 2024, reflecting a 16% drop. This correction has left investors anxious, but history suggests that downturns like this may eventually give way to periods of strong recovery. For example, the Global Financial Crisis (GFC) took nearly five years for a full recovery, whereas the market rebounded just 10 months after the COVID-19 correction.
In its strategic outlook report for March 2025, Mirae Asset Capital Markets points to Value, Alpha, and Momentum strategies as the best approaches for navigating the current uncertain environment. These strategies have historically proven successful during periods of market recovery:
Value Strategy: This approach focuses on undervalued stocks with solid fundamentals. It tends to outperform during high-return years, which often follow periods of low returns. Given the potential for market recovery in 2025, investors may find significant opportunities by focusing on value stocks.
Alpha Strategy: Alpha investing involves identifying stocks that have the potential to outperform the broader market. This strategy is effective during both high-return and low-return years, offering consistent returns despite market conditions.
Momentum Strategy: Momentum investing capitalizes on stocks that are trending upwards, betting that recent strong performance will continue. This strategy is well-suited to high-return years, when the market sees rapid upward movements.
"Investment Strategies Traditional valuation models may not be reliable in an uncertain environment. Instead, Value, Alpha, and Momentum strategies have historically delivered robust returns. Historically, a low-return year (like 2024) is often followed by a strong rebound year. The Value Strategy tends to outperform in high-return years, while Alpha & Momentum Strategies offer consistent returns across different market conditions. However, there have been instances of prolonged low-return years (FY11-FY13), reinforcing the need for caution," said Ravi Kumar and Shivali Bhakta, analysts at Mirae Asset Capital Market.
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Low return years followed by high return years: Value strategy gives best return during high return years
"During high return years, Value based strategy investment has given superior average returns. But Alpha and Momentum based strategy investment has given consistent returns. Momentum strategy has beaten the benchmark more often. During low return years, Low volatility based strategy investment has given better returns," noted the report.
Impact on different asset classes during challenging situations:
• Gold prices increased by 8%/ 22%/ 16% during GFC/ Trade war/ Covid. Currently its up by 12% and expected to increase further.
• Bond yields generally fell, and it mostly happens towards the end of cycle when central banks take action to control the economy.
• Dollar strengthens (Rupee depreciates) – The trend suggests that Dollar strengthens initially and weakens from its peak during the challenging periods. And post normalization, Dollar strengthens further.
Macroeconomic Fundamentals Remain Strong
Despite the market's correction, key economic indicators provide a solid foundation for future growth:
GDP Growth: India’s GDP grew by 6.2% in Q3FY25, an improvement from 5.6% in Q2FY25. This steady growth is expected to continue, driven by strong domestic consumption and resilient exports.
Inflation: Inflation has trended lower and is expected to remain within the RBI’s comfort zone, hovering slightly above 4%. The RBI's monetary measures have supported liquidity and are expected to result in further rate cuts, providing additional economic stimulus.
Fiscal Deficit: The government is on track to meet its fiscal deficit targets, with projections of 4.8% for FY25 and 4.4% for FY26. This indicates sound fiscal management and a commitment to long-term growth.
Market Inflection Points and Global Context
An inflection point in the market occurs when over 15% of Nifty 500 companies trade above their 200-day simple moving average (SMA), signaling potential for extraordinary returns. Historically, when this happens, the market sees average one-year returns of 35%-40%, excluding outlier events like the GFC. However, as of February 2025, fewer than 15% of Nifty 500 companies are above their 200-day SMA, suggesting that a full recovery is not yet in place.
Global factors are also influencing India’s market performance. While gold prices have risen by 12% during the current uncertainty, reflecting the trend during previous crises like the GFC and COVID-19, bond yields have begun to decline as central banks stabilize economies. Additionally, the US dollar has seen fluctuations, initially strengthening during crises but weakening as the situation normalizes.
India’s Market Valuation
India’s market valuation has seen mean reversion, but it remains higher than its peers. The Nifty 1Y Forward PE has dropped to 18.9x, reflecting a return to historical averages. However, compared to China and Brazil, India’s market is still relatively expensive. In fact, FIIs have been pulling capital from Indian markets, leading to a 3.4% YTD decline in the Nifty, while Brazil and China have seen positive returns of 15% and 3%, respectively.
Certain sectors have experienced more significant corrections than others. The most affected sectors include Media, Realty, Utilities, Oil & Gas, and Auto, while sectors like Banks, Pharma, Metals, and IT have seen relatively smaller declines. Sector valuations are also varied: FMCG, IT, Pharma, and ConsumerDurables are trading at above-average valuations, while Banking and Media are undervalued.
