We feel that in the near-term, the trend of the market will be dictated by macro releases which is weak while premium valuation is limiting upsides in the short-term.
The second-quarter results are over and it has been better-than-expected. For large-caps, it is marginally above the estimates with Nifty profit after tax (PAT) growing by 10 percent (excluding telecom) on a year-on-year (YoY) basis against flattish expectations.
While for the broad market like Nifty500 it is much better with more than 20 percent on a YoY basis and 10 percent on quarter-on-quarter (QoQ) basis. This is due to cut in corporate tax, reduction in raw material cost, better-than-expected results from midcaps and sectors like Banks, NBFCs, Cement and FMCGs.
Post Q2, we have noticed some upgrade in the rating of mid and small-caps largely due to stability in valuation which is below the long-term trend and in expectation of improvement in their business during FY21.
We have also turned positive on the oil & gas sector due to attractive valuation and expectation that divestment plans will revive the valuation of oil refinery and distribution companies.
Last week, the market touched the psychological mark of 12,000 and 40,000 for Nifty & Sensex respectively.
The recent rally was led by measures announced by the government for the realty sector to provide liquidity for stalled projects and strong cues about progressive developments in the trade deal between the US-China.
This got offset by some profit booking at the end of the week due to downgrade in India’s rating outlook to ‘negative’ from ‘stable’ by Moody’s.
The rupee weakened to a monthly low factoring the weak fiscal position of the government. The market also turned watchful with a negative bias considering the key economic data being announced this week.
Weak global headwinds and disappointing economic data in India with low factory data and increased inflation is hurting the domestic market. Based on this, the GDP forecast is being downgraded for FY20 from the past quarter's 6 percent to below 5 percent now.
We feel that in the near-term, the market trend will be dictated by macro releases which are weak while premium valuation is limiting upsides in the short-term.
CPI climbed to 4.65 percent much above the Reserve Bank of India's average forecast for FY20. This is unlikely to change the accommodative monetary policy of RBI immediately.
The RBI may continue its dovish view and its interest rate cutting strategy to support the economy but a further hike in the forecast for inflation will demand a more careful strategy in the future.
Despite the festive season, the IIP steeply declined by -4.3 percent YoY in September. This is likely to impact the actual GDP data of Q2, to be announced at the end of the month.
The range of forecast for Q2 GDP by economists is 4.2-4.7 percent from the actual 5 percent in Q1. For FY20, RBI had forecasted a growth of 6.1 percent which will be downgraded further.
We could have some hiccups in blue-chips stocks due to premium valuation in the short-term. The trend of the equity market will be cautious in the short-term as the gap between valuation and earnings growth has expanded post the recent rally.
Nifty is trading at one year forward P/E of 19x & 25x on 12month trailing basis which is in line with last high.
The author is Head of Research at Geojit Financial Services.Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.