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Despite steep fall, experts wary of more corrections as macro factors weigh on markets

A steep earnings downgrade cycle could be a possibility which is still not fully reflected and could be one of the key risks for equity markets apart from the possibility of outflows from debt and bond markets

June 27, 2022 / 08:37 AM IST
Share Market News, Stock Market News

Share Market News, Stock Market News

Bulls had a ball for 18 months, but when bears swooped in, the markets went into tailspin and lost over 17 percent from the its last October record peak. The pessimism in the air can be gauged from the fact that foreign investors pulled out nearly 2.5 lakh crore in the last eight months - almost what they had invested in the last seven years in Indian equities.

“Typically there are three stages in a larger market fall,” said Anil Rego, Founder and Fund Manager at Right Horizon PMS.  The first stage is at 10-20 percent; the second at 20-30 percent and the last above 30 percent.  There have been two instances in the past when markets corrected more than 30 percent.

“We have seen a stage-one fall and the possibility of a stage two looks imminent because of global factors and one must keep in mind that the US has been in a bull run for over a decade and this possibility of a larger fall is real,” Rego said. "If NASDAQ breaks down, this is a possibility."

Persistent high inflation, intensifying fears of a recession, worsening geopolitical crises, deepening negative sentiment in markets world over, high commodity prices, disrupted supply chains, exodus of foreign portfolio investors, and a weakening rupee - all these have dampened the investor sentiment and also enhanced volatility in the markets.

“The factors which are governing the market sentiments are dynamic in nature and may prevail till the concerns stabilise,” said Ravi Singh, Vice-President and Head of Research at ShareIndia.

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The main risk is high inflation, which is also the basis of a host of collateral risks. “High inflation forces the central banks to take a hawkish stance and raise rates which impact the economic growth and valuations of equities and debt,” said Deepak Jasani, Head of Retail Research at HDFC Securities.  Sharp rise in rates in a small time window can lead to recession in some economies.

“I believe crude oil has been the main culprit and mother of all negative factors triggered by the Russia-Ukraine war resulting in rising inflation followed by rate hikes by the central banks, FII selling, recession fear and expected earnings downgrades,” said Prashant Tapse, Research Analyst and Senior VP of Research at Mehta Equities.

How the picture is likely to unfold

“Bulk of the price correction in benchmark indices seems to be behind us now, but there could be time correction going ahead with markets consolidating around the 15,000 level on Nifty,” said Gaurav Dua, Senior VP and Head of Capital Market Strategy at Sharekhan by BNP Paribas.

“If we look at the valuation data on trailing twelve month (TTM) earnings basis, the Nifty trades at 20-21x FY22 EPS (earnings per share) which is not very far away from multiples of 18.5-19x made during the lows of March 2020 after breakout of the global pandemic,” Dua said.

Also, the sentiment indicators point towards excess pessimism. Over 85 percent of BSE 200 stocks are now trading below their 200 day moving average (DMA); and even in the US, close to 88 percent Russel 2000 constituents are trading below their 200 DMA. In the past two decades, the returns have been quite healthy over a period 12-24 months if investors buy amid such heightened weakness in sentiments.

Also, commodity prices have started to cool off and any positive development towards ending the Russia-Ukraine conflict could turn around the dynamics.

Are all negative factors priced in

Everyone who has an inkling towards financial markets wonders if there are any more surprises in store or the markets have priced in all the negative factors after such a steep fall from the top.

Experts believe that the markets have priced in most of the factors but it is too early to say if the market has seen its bottom. How things will unfold in the coming quarters will be the key indicator about the health of the markets, especially the corporate earnings, in the coming earnings season and the next. Till the time inflation and other factors stabilise, the markets will continue to gyrate to the tunes of volatility.

The biggest factor that experts unanimously believe can spring major surprises is the impact of rising interest rates on the earnings of the corporations globally. The market is building a 100-125 basis points hike in interest rates in India, Europe and the US over the next few months. Also, the aggressive rate hikes could result in a recession in the US and a slowdown in various other economies.

"The impact of the same is not fully reflected in the earnings estimates by analysts globally and a steep earnings downgrade cycle could be a possibility and could be one of the key risks for the equity markets going ahead,” added Dua of Sharekhan by BNP Paribas.

The other cause for concern was skyrocketing 10-year US treasury yield, which hit 3.48 percent last week, the highest in 11 years. “The fact that the Fed has stepped up to raise rates faster, the street suspects the RBI will have to catch up with the Hawkish Fed,” added Tapse. Else, the stronger US dollar would make India’s imports expensive, especially the oil and commodity imports. Ultimately, that would lead to higher inflationary pressures and a hawkish RBI.

“The increase in rates in the US also raises a major possibility that apart from the equity market, other markets like debt and bond market may also see FII outflow anytime soon in India,” said Singh of ShareIndia. “If this happens, then we may see another round of selling in the equity markets.”

Rego of Right PMS suggests that the market has not yet priced in a cyclical turn for NASDAQ in particular and the US as a whole, after a large bull market, the fall can also be significant. He believes that the Indian Indices have a downside potential of an additional 15 percent fall if NASDAQ goes into a next-stage fall.

Ray of hope

The positive support came from a statement by Federal Reserve Chairman Jerome Powell. “The American economy is very strong and well positioned to handle tighter monetary policy,” he said. Also the other major positive was that crude came down below $100 a barrel for the first time since January 2021 and is down over 20 percent in the last one week from the highs of $125 a barrel. This supported the markets to sustain a bit.

Experts are of the opinion that the levels of 14,800–14,500 stands as a very crucial support for the Nifty and they expect that the Nifty would be able to sustain these support levels. They see a major rebound from these levels if some of the underlying factors turn favourable.

Disclaimer: The views and investment tips of investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Gaurav Sharma
first published: Jun 27, 2022 08:37 am
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