Dhruv Goyal on the Small Diversions in Indian Markets’ Resilience and Risks
Indian markets have exhibited notable resilience, maintaining an upward trajectory even amidst global headwinds. Dhruv Goyal, Founder of Four Lion Capital, credits this strength to a steady domestic capital inflow and solid earnings growth. He acknowledges that challenges like foreign investor outflows and global economic uncertainties have posed risks, but India’s stock markets, especially the Sensex and NIFTY 50, have stayed on course since 2015. However, Goyal warns investors of rising valuations, particularly in the small and mid-cap space.
“The Indian stock market has been remarkably stable since 2015, posting positive returns each year,” said Goyal. He cited the pandemic years of 2020-2021, where despite a contraction of -7.3% in GDP, Indian equities managed to grow. “Even as foreign investors pulled out billions, domestic capital helped sustain the market's momentum,” he explained.
Goyal attributes a major part of this resilience to strong domestic capital, which helped offset volatility caused by FPI outflows. According to Goyal, the substantial increase in domestic assets under management (AUM) has formed a strong foundation for the market's future growth.
However, Goyal raised concerns about current valuations, especially in smaller stocks. He pointed out that while large-cap stocks have reasonable valuations due to corporate deleveraging and a healthy CapEx cycle, the NIFTY MidSmallCap 400 Index is trading at elevated P/E ratios. “We’re seeing prices driven by valuation expansions instead of actual earnings growth, which could be a red flag,” he remarked.
Despite these concerns, Goyal is optimistic, provided domestic capital flows continue. He also noted a significant change in market ownership dynamics, where DIIs and retail investors now dominate the market while FPIs have decreased their holdings.
