Where are the Indian Equity Markets headed ?
The answer to this question lies in the several factors that are playing out currently:
It continues to be strongly up and it feels like Internet days of 1999/2000.
Extraordinarily loose monetary policy all over the globe not only in terms of low interest rates but also flooding the system with liquidity (Ex: US Fed has expanded its balance sheet from USD 4 to 7 Trillion) has led to one of the most spectacular liquidity driven rallies, that one has seen for a long time.
In India too, the banking system is flush with excess liquidity (over 7 lac Cr) like never before.
While HNI investors have been booking profit with every rise, FPI’s have pumped in a staggering amount of around 1 lac Cr in a short span of last two months.
Historically Earning multiple (Forward) averages at 17.5. Based on FY 22 forecasts, market is currently trading at a multiple of 22/23. This is about 20% higher than the average historical levels.
While markets are not massively overvalued but surely, they are in overvalued zone on this measure.
The bounce back in various economic indicators in India has surprised most market pundits. GST collections are at similar levels like last year. Nifty profit (Q2 FY 21) is up 17% year on year. Electricity consumption is at same level as a year ago.
However, we strongly feel that the sharp bounce back is mostly due to the pent-up demand.
We do see the aggregate demand weakening going into January to March quarter 2021. Though thereafter as the vaccine rolls out, gradually things will normalise.
Despite the extraordinarily loose monetary policy as well as several measures that have been taken to help the small and medium enterprises (MSME), this once in a century PANDEMIC, would still leave its impact on our economy and we can only ignore it at our peril.
There are certain positive factors playing out though – (1) For instance, the pandemic induced trend of global sourcing shifting from China to India (2) Measures announced by the Govt. such as PLI, Farm Laws etc are definitely important reforms.
4) Global Central banks providing a one-way bet
It has been a trend for some time now that the central banks globally have done whatever it takes to prevent any sharp market sell off. As such there is a perception amongst market participants that the central Banks will not let the markets fall. We feel this psyche too has a significant role to play in the unprecedented rally that is being witnessed everywhere.
The hazard is that this may not only lead to inflation but also to a bubble ultimately.
5) Likely Change in central Bank stance in India by April 2021
In the case that the Indian economy recovers going into FY 21, there is a decent odd that RBI will start the tightening process by April 2021. It may first remove the excess liquidity and then raise the reverse repo rates to 4.0% levels.
This change in stance could be a big dampener to the equity market and we see this as one of the biggest risk factors.
Our NIFTY target at 14,000 for Dec 2021 is not much higher than the current levels. As such we feel the easy money has been made, though we do not see a sharp sell off.
The NIFTY forecast is muted mostly because we expect the interest rate as well monetary policy stance to reverse going forward and act as a significant headwind. Moreover, if the economic recovery disappoints in the next two quarters, there are downward risks too.
We do feel that a 10 to 15% correction is on the cards as the Economy is likely to weaken going into the last quarter of FY 21. As everyone is very bullish, long unwinding may push the markets further down for a short period. However, we see any such sell off as buying opportunity. As the vaccine rolls out things would steadily normalize eventually.
As interest rate cycle reverses, next two/three years will be difficult for debt markets from the duration play perspective.
Neither is there much juice left in the credit play, as yield spreads have already narrowed significantly and also the current YTM’s are at one of the lowest levels.
Hence going forward debt market returns too will be very muted.
We strongly advocate reducing Equity allocation to 35 to 40% as of now, more as a tactical play, so that one has the fire power to take advantage of 10 to 15% correction that is likely.
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