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[email protected]: Macro indicators augur well, but expect correction soon (Special to IANS)

By Deepak Jasani
Mumbai, July 25 (IANS) Nifty has touched 10,000, taking only 4.3 months to move from 9,000 points to 10,000. Since inception, the index of the National Stock Exchange has given an annualised return of 11.2 per cent.

A day before, on July 24, Nifty 50 was trading at a price-to-earnings ratio (P/E) of 25.45x and price-to-book value of 3.55x which are lower than the previous highs of 28.5x on February 11, 2000 and 6.6x on January 8, 2008, respectively.

A series of positive news and developments, including the ruling party’s strong win in the UP elections, a stable (mildly appreciating) rupee, a normal monsoon, a smooth initial rollout of Goods and Services Tax (GST), continued reform initiatives of the government and macro-economic improvement have helped Indian markets to be one of the world’s top gainers.

Macro indicators like fiscal deficit and current account deficit also seem to be in better shape. Falling inflation has raised the possibility of an interest rate cut. The Indian economy could soon rebound after demonetisation pulled down the growth rates in the January-March quarter.

Monsoon is predicted to be normal this year and so far it has been in the normal range. A second consecutive year of normal monsoon will be a major boost to the agricultural/rural sector and the trickle down effect of this could be witnessed across the country later.

As far as fresh investment at these levels is concerned, it is more a factor of how much are investors currently invested. If they are underinvested in equities, then even at these levels they could keep investing in a staggered manner having regard to their stock and sector weightages.

In case they are adequately invested in equities, they could wait for a correction (which could be anywhere between 9 to 14 per cent in Index and even higher in individual stocks), going by the past bull markets and their corrections.

Systematic investment, starting even at the peak of markets, results in attractive returns if done in a disciplined manner over long periods. On studying the performance of a particular mid-cap scheme, we found that it was comfortably able to beat the benchmark even when the investments were started at a peak.

Retail investors may use this rise to re-weight their broad asset allocation, relook at the stocks that they own and clean/shrink their bulging portfolios of stocks. They may avoid chasing stocks that are at steep valuations but keep hunting for opportunities in the small/midcap space where promoters show genuine interest in improving shareholder value by restructuring their businesses/companies.

For investors who are under-invested in stocks, SIP in select equity stocks may be looked at.

Nifty keeps making new highs driven by micro developments (whether on results, announcements or otherwise). Advance-decline ratios, however, remain negative on most days suggesting intermittent profit taking across the board in small and midcaps.

Nifty in this upmove has touched 10,000 and could rise some more by the middle or end of August 2017 by when we feel it would be ready for some reasonable correction.

Globally, the risk on sentiment is alive. There is some uncertainty on the timing, pace and quantum of interest rate hikes to be conducted by the central banks. Balance sheet unwinding by them is also an unknown factor as far as the beginning and speed is concerned. The US Fed will meet on July 25-26 to decide on interest rates. Some clues about the above will be available after that meeting.

While India is unlikely to remain insulated from ongoing adverse global developments, it will likely outperform its emerging market (EM) peers. India’s macro fundamentals have improved considerably in the past 38 months, which makes it easier for the economy to absorb the adverse impact of potential external shocks compared to other EM peers.

India’s growth model is likely to be based on productivity growth and driven by domestic-demand, which is distinct from the East Asian model of large-scale capital investments and a state-led push for manufacturing exports.

The 2014-15 fiscal saw the return of the Indian investor to the equity market after many years. We expect the inflows to continue going forward as well.

Equity ownership of Indian households remains abysmally low — both in absolute terms as well as compared to historical levels seen in 2007-08. As these holdings start to get normalised, they can sustain large inflows into equities.

While optically the markets may seem to be expensive going by historical standards, bulls believe that P/E multiples are inversely correlated with the cost of capital. Further, markets typically top out at times when the economy is overheated. Index composition/changes and index earnings composition (losses by some large companies offset profits by others depressing the index earnings) are other parameters to check whether the markets are really overvalued or not.

We think the truth lies somewhere in between. If the economy is close to the bottom and corporate earnings are slated to recover soon, then the P/E ratios will look reasonable going forward. However, in case earnings recovery is delayed due to any reason, markets may be expensive and may remain sideways for an extended period, if they do not actually fall.

While the largecaps have their own headwinds in different spheres, mid and small caps will keep throwing up surprises in stock moves.

(Deepak Jasani is Head of Retail Research at HDFC Securities. He can be reached at [email protected])

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