India’s economy is growing at a pace that would normally make investors happy. But the stock market is telling a very different story.
The stock market, however, is heavily influenced by a relatively small number of large listed companies. Take IT companies. India’s domestic economy can grow strongly, but India’s large IT exporters depend heavily on global clients. Client caution and changing economics around artificial intelligence are also affecting the outlook for the sector.
So, an 8 per cent-growing Indian economy does not automatically mean every large listed company will see its profits rise at the same pace.
Ajay Kumar Yadav, CFPCM, Group CEO & CIO, Wise Finserv, told NDTV that the current weakness should not be seen as a sign that India’s growth story has broken down. The issue, he said, is that economic growth, corporate earnings and stock-market returns can move on different timelines.
When valuations become stretched, earnings eventually need to catch up. Until they do, stocks can remain flat or even fall despite decent economic numbers. Because investors may have already paid a high price for the growth they expected.
Yadav of Wise Finserv said investors should focus not just on India’s growth rate, but also on whether corporate earnings can keep pace with the valuations investors are paying.
Investors buy stocks based on their expectations of future earnings. If strong economic growth has already been factored into stock prices, a better-than-expected GDP number may not be enough to push the market higher. Because gDP numbers are strong, stock prices do not rise simply.
