In the last six months, we had a V-shaped recovery in Indian equity markets. The Nifty50, Nifty Midcap100 and Nifty Smallcap100 are up 57 percent, 63 percent and 90 percent, respectively, from 52-week lows.
Valuations are above pre-Covid level while economic and earnings growths are negative and likely to stay dull for the next six to nine months.
A correction was necessary and was visible from the volatility building-up in the last one month. We should not be surprised at the fall neither should we worry about it and consider it as a change in trend.
Of course, volatility is expected to stay, maybe for the next two-three months. At the same time, we should also acknowledge that a reversal could happen swiftly, if the fiscal and monetary stimulus is provided. The momentum will get stronger if new coronavirus cases stabilise. The new wave of infections is impacting world economy due to additional restrictions.
The economy is working on a “new normal” and economic activities are expected to overcome the challenges by improving on a month-on-month basis, though new restrictions will slowdown economic rebound in the short-term.
This situation will persist till we have a vaccine, which could take another nine months to a year. In the meantime, herd immunity and fall in virus mortality can help overcome the challenge. The economy is going to move on and positively attempt to overcome the slowdown with further fiscal and monetary support.
The first tranche of fiscal and monetary measures helped in providing financial support to households and private sector to handle economic uncertainties. The financial market needed qualitative support or the collateral losses would have led to a collapse of the world financial system.
Today, the economy is expected to grow steadily, though slow, from the worst quarter of April to June 2020. The economy needs one more qualitative measure to sustain financial confidence, economic persistence and stop financial losses.
A second wave of support in the US can be expected post presidential election and in Euro region, ECB is planning something similar by December 2020. The market will have to manage these two-three months of uncertainties and the economy may slow down due to spurt in Covid-19 cases.
This week, the Nifty50 corrected 3.8 percent. From the recent high to low, it has corrected by 8.5 percent. A correction was anticipated in the last couple of weeks, which was visible in global volatility, currency and dullness in Indian heavyweights.
The fast recovery from the March low was supported by bounce in global markets, domestic and FII inflows, and due to easy money policy. The gains in prices took market ahead of fundamentals and it was always going to be difficult to sustain the rally without a proper improvement in economy or earnings growth.
Market reached near record high while corporate profitability was at a new low for FY20, which is going to get worse in FY21. Valuation went above pre-Covid level and new funding to record highs. In the last four months, estimated amount of primary deals (IPO/Rights/OFS/QIP) is about Rs 1,20,000 crore. Primary market was made more lucrative by providing huge discount in prices compared to secondary market. Money may be shifting from secondary to primary segment given the arbitrage opportunity.
At the same time, FII inflows were getting reduced due to caution in global markets as a result of high prices, slowdown in economic recovery and a spurt in Covid cases.
The Nifty50 has corrected about 1,000 points from the recent high and is trading at important technical support levels, especially for largecaps while mid & small caps may continue to be weak.
We feel that 10,300-10,500 is a strong support for the Nifty and the fall is expected to be limited to about 5 to 7 percent more.
The sectors such as pharma, IT, FMCG, chemicals and telecom, which are defensive and have a positive outlook despite a weak economy, will tolerate the negative trend of the market and bounce back stronger compared to the other sectors.
In the last one month, we have been suggesting profit booking to traders and cautioned long-term investors to buy only on dips. Accumulation will be the best strategy in the coming two-three months, and based on the muted global trend, the momentum of Indian market will be volatile in the short term.
(Vinod Nair is the Head of Research at Geojit Financial Services.)
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