Indian Markets Rally on Rate Cut Hopes, PGIM Mutual Fund Cautions on Overvaluation

Indian markets gained nearly 1% in intraday trading today, marking the eighth consecutive session of gains.

This positive momentum came after U.S. Federal Reserve Chair Jerome Powell suggested a potential interest rate cut next month, which boosted investor sentiment. Speaking at the Jackson Hole Symposium in Wyoming, Powell said, “The direction is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

From an Indian market standpoint, this is important because it supports the minority view of the 2 independent members of the Monetary Policy Committee (MPC), who favoured rate cuts in the last policy meeting. With India’s core inflation at just 3% and economic growth slowing down, the MPC is expected to cut rates by 25 basis points in its next meeting.

PGIM India Mutual Fund believes that certain events could impact markets in the short term. These include regional conflicts, changes in interest rates by central banks, and the unwinding of the Yen carry trade.

Overvaluation Risks Highlighted in Recent Report

In a recent market outlook report, PGIM mentioned that the strong market re-rating over the past year suggests that Indian markets may have already accounted for some future returns. The fund highlighted areas of overvaluation and excessive optimism, particularly among smaller market capitalisation segments, where high valuations already reflect high earnings expectations. PGIM cautioned that if these earnings do not meet expectations, there could be a risk of earnings downgrades and declines in valuation multiples.

“We find pockets of overvaluation and exuberance, especially in certain lower market capitalisation segments which are already factoring a good amount of earnings growth along with lofty valuations, where, if earnings do not materialise, then there is the possibility of earnings cut as well as multiple de-rating,” said the MF.

Focus on Sustainable Earnings Growth

PGIM India Mutual Fund thinks that large-cap stocks are priced more reasonably than mid and small-cap stocks. However, they also believe that all market segments have strong long-term growth potential, supported by sustainable value growth due to India’s strong economic performance.

The report advises investors to focus on earnings growth as the main driver of returns going forward. Companies that can consistently achieve this growth without taking on excessive debt and can wisely reinvest their capital are expected to perform better than those that cannot.

Avoid Overpaying for Temporary Growth

PGIM also warned against getting caught up in market excitement and paying too much for temporary growth, stressing that sustainable earnings growth should be the primary focus for future returns. The report also emphasised the importance of staying grounded and avoiding overpaying for short-term growth.

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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.