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Global cues, not Budget, to decide market trend in medium term

Expectations that the government will find a balance between populism, reform and growth in a weak fiscal position are a high risk in themselves.

January 31, 2021 / 10:46 AM IST

The long expected market correction has started. The Nifty50's recent high and low are 14,754 and 13,577, a correction of 8 percent compared to the 96 percent rally in a period of 10 months. Our view is that the long-term trend is unlikely to change to a meltdown, it will be an intermediate correction. Our target for Nifty50 is 14,500 for December 2021, assuming high double-digit earnings growth and that premium valuation will stay in 2021. Our rationale is that a correction of 10 to 15 percent is essential for a liquidity-driven rally to bring soundness and moderate the overvalued market, created by the oversupply of global and retail inflows.

It is a well-known factor that a change in foreign institutional investor (FIIs) inflows will impact the domestic market. FIIs brought Rs 1.5 lakh crore of net equity in the last four months and markets were up 30 percent, during the period. A change in trend is visible from January 22, with consecutive outflows. In the later part of the previous week, MFs supported with buying without help to the negative momentum.

The outflow is largely generated by the risk triggered by the over- enthusiasm of global trading. During the week, we had profit-booking and volatility in the global market led by speculative trades undertaken by retail and hedge fund investors.

Speculations are happening beyond the fundamentals of the economy and stocks due to a high amount of funds in the hands of investors which is increasing the risk-taking appetite. Such gambling cannot persist for a long time, which is supported today due to high book profits and easy funding. The market will move toward equilibrium in the medium-term in line with the fundamentals, tightness in easy money either due to margin safety & hike in yield and stringent measures, which may be introduced by the regulator to control risk, improve the safety of the system and lower excess speculation.