Indian market unlikely to catch a cold when Wall Street sneezes; top 5 reasons

The US market which has already rallied up to 12 per cent to touch fresh record highs since November 8th election win of President Donald Trump, may not continue the winning run as most market gurus predict 5-10 per cent correction in near-term.

US stocks struggled last week as President Donald Trump failed to gather majority on health care reform in Congress which raised questions about his ability to push through other key reforms promised in his election campaigns such as tax cuts and fiscal spending to boost the economy.

US markets went higher on bets that lower taxes, deregulation and fiscal stimulus would boost economic growth and corporate earnings, but the hopes are soon fading away. If the US market does go into a tailspin, it would have the rub-off effect on markets across the globe including India.

However, for India, most analysts predict at best a knee-jerk reaction as there are a lot of domestic triggers which could support the market when foreign institutional investors (FIIs) might be selling.

“It does appear that when we do get a correction in US markets, either now or after a further rally, the Nifty may drop below 9,000 levels. I would imagine the reasons for the correction may be linked to a global event and not a domestic one,” Amar Ambani, Head of Research, IIFL Wealth & Asset Management told Moneycontrol.com.

The US is the biggest financial powerhouse controlling about 38 per cent of global market cap and any rupture in the bull-market there will have a spillover effect in markets across the globe including that of India.

In terms of relative valuations, US stocks are trading well above their historical averages while Emerging market stocks including India market is still broadly in line despite a recent bounce.

"The setback from the Healthcare bill is not a trend reversal but a correction could extend up to 5-10 per cent in US markets, but emerging markets like India and China are likely to do well," Ken Peng, Asia Pacific Investment strategist at Citi Private Bank said in an interview with CNBC-TV18.

Going by the buzz on D-Street, we have created a list of top 5 factors which will provide support in case markets starts to drift lower:

Reform Process:

Indian market should outperform in case the Wall Street starts to drift lower supported by the reform process initiated by the Modi-led government. The finance minister introduced four bills on Monday aimed at rolling out the much-awaited Goods and Services Tax (GST).

The government proposes to launch GST from July 1. It is estimated that rolling out of the GST can add up to 2 per cent to India's economic growth. Apart from that, the govt and the RBI is making effort to bring down the burden of the non-performing asset on the balance sheet of banks.

“There is huge liquidity in the system which will keep the bull engine going on for the Indian market, plus the speedy reforms will lay the foundation for a sustainable bull market for years to come,” Jimeet Modi, CEO, SAMCO Securities told Moneycontrol.com.

Channelization of household saving:

Backed by household savings, domestic flows into the mutual fund sector have been increasing in the recent months and demonetisation has added to this trend.

According to the global financial services major, Citigroup in a report said that rising domestic flows in MFs suggest the channelising of household savings in the form of cash towards financial assets.

Domestic fund flows to stock markets could potentially double in the financial year 2018-19 to USD 55 billion, from USD 28 billion recorded last fiscal, said a Citigroup report earlier in March.

“The demographics and channelization of savings into equity is the most powerful trigger for the sustained bull market in India, the recently concluded demonetization will just accentuate the trend into equities market,” said Modi of Samco Securities.

India - attractive investment destination:

India’s relative positioning is only improving vis-à-vis other emerging markets and enjoys overweight stance in most FII portfolios.

“Many Emerging Markets (EMs) are suffering due to borrowings in US$, which has appreciated strongly while others, who rely on the US for exports, are now facing the brunt of protectionist policies,” Amar Ambani, Head of Research, IIFL Wealth & Asset Management told Moneycontrol.com.

“India’s growth is now ahead of China, which is a huge standout. This puts India on the preferred list of FPIs,” he said.

Preferred Asset Class - Equities:

Most analysts see a structural shift in domestic liquidity from physical savings to financial savings. Ambani of IIFL Wealth & Asset Management is of the view that the charm for physical assets has dwindled and with yields on 10-year G-Sec also falling significantly, the interest on deposits earned is also ordinary to attract investors.

“Equities are now the natural choice, with the hope of a significantly improved FY19 in terms of earnings. We see growing SIPs in equities as sustained investments that will keep flowing in, month after month,” he said.

Better Earnings:

After a stable December quarter results most analysts are factoring a relatively better March quarter. The management commentary for most companies suggested that the demonetization impact is largely over.

“Given the low base, stable commodity prices and revival of consumption led demand, we expect strong double-digit earnings recovery over FY18-19E,” Pankaj Pandey, Head of Research, ICICI Securities told Moneycontrol.com.

“We assign a multiple of 16x on FY18E & FY19 average EPS (average of Rs. 1750 and Rs 2098) to arrive at a fair value of 30,800 as our CY17/FY18E target for the Sensex and 9,300 levels for Nifty50,” he said.