Sanjiv Bhasin of IIFL says my call is that the next 2 months can see the much-needed correction with Nifty seeing levels of 8,600-8,800 by end July.
By Sanjiv Bhasin
Globally markets have seen 2017 bring home the sweetest returns as equity as an asset class has outperformed. The return of the ‘risk on’ trade has seen huge liquidity flow into first the developed markets and then later chase ‘high beta’ returns in emerging markets with high double-digit returns in most markets YTD (year-to-date) given below.
The best performing countries are mostly beaten down debt-ridden high-risk one like Argentina and Greece while the other performers are emerging markets with Turkey, India and Poland being the respective ones from peripheral Europe and Asia.
The Hang Seng (Hong Kong) index has been a recent performer and showcases the preference for Chinese stocks listed there rather than the Chinese Index which has grossly underperformed.
The Nifty has climbed the proverbial ‘wall of worry’ after the devil of demonetization proved most skeptics wrong and turned out to be the blessing in disguise for the mutual fund industry.
The flows into SIP (systematic investment plans) from November 2016 after the demonetization event have been the highest ever witnessed since the launch of mutual funds and are gaining traction month on month despite the indices touching new highs.
Added to this, we have the best macro situation for the country as crude stays below USD 50, the rupee hits nearly 3-year highs and the balance sheet of India Inc. looks in the best shape in the last 6 years.
However, the caveat “too soon too fast” now seems in place as complacency seems the buzzword in market circles.
The consensus bullishness by the local flows has seen mutual funds get the money they never imagined of in a short period, which is seeing good business get extremely expensive as stock prices rise sharply which leaves the fund manager little choice but to buy companies which are cheaper but where profitability is struggling.
The over ownership in consensus bullish sectors like consumer staples, discretionary, banks, auto’s & banks seems over done while under performance in large export dominated plays like pharma & IT may continue in the near term.
The other caution comes from the ‘left out’ feeling so large as fence sitters who doubted the rally now join in which sees prices jump higher & valuation justification out of sync.
Most consensus foreign institutional investors are now turning bullish after having missed the bus when fear was dominant because of demonetisation & prices were cheap.
Their fresh entry makes the case for a correction in the market inevitable as after a heavy non-stop rally the markets are in danger of overstretching themselves without any meaningful correction.
The positions in the derivative markets are also seeing retail investors/traders make huge positions in the leveraged trade with ban position in most high beta counters & PCR (put call ratio) stretching to 1.41 which indicates highly overbought conditions.
Hence, the way forward for the retail investor continues to be SIP investing in good stocks or indices as the present rally from 7900 to 9600 without stop may be nearing the end with another 200 points on the upside.
The recent GDP data released also showcases that growth is still lacking with 6.1 percent reflecting partly the disruption of demonetisation & also the no pick up in capex cycle investing from the private side with Government being the sole spender.
Further, the Trump led rally globally is seeing hiccups as President Trump seems to be in the eye of the storm with issues on the passage of reforms being shrouded in Russian liaison controversy.
Globally also the European recovery led rally may be peaking as ECB itself sounds cautious on the US protectionist approach & feels the need for a further stimulus of money printing may be nearly over.
My call is that the next 2 months can see the much-needed correction with Nifty seeing levels of 8,600-8,800 by end July as earnings recovery, rupee strength & global sentiment take a corrective course & greed sees a change of sentiment with rationality returning.
Hence, in the near term markets are typically depicting the bull in a China shop adage with a correction in the offing, however, that much-needed correction would be the proverbial tipping point to enter the markets with year-end targets on Nifty of over 10,000.Disclaimer: The author is EVP, Markets & Corporate Affairs at IIFL. The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.The Great Diwali Discount!
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