Udayan Mukherjee Moneycontrol News
For traders who have participated in the recent market rally, it may be prudent to take some profits ahead of the assembly elections' results next week, CNBC-TV18 Consulting Editor Udayan Mukherjee told Moneycontrol.
“This is not based on some great election insights,” he said.
"We had a 1000 point rally, many stocks have rallied 15-20 percent from their recent lows, where the cookie may crumble either way, and it may be prudent to be cautious, take some profits and see how this event pans out.
After that we need to see how much the risks from weak domestic and global growth will allow the market to flesh out its recent gains. But since we are standing at the cusp of a major event, and people have made trading gains, it makes sense to protect some of the gains,” he said.
According to Mukherjee, the recent pullback is more of a relief rally, driven by the steep fall in crude prices, strengthening of the rupee and decline in bond yields.
"Because of these changes, FII selling has reduced, and in fact, FIIs have been net buyers (of equities) over the last couple of weeks,”
"What the market has done is merely reprice some of the risks (related to rupee, crude and bond yields)," he said.
Mukherjee said the next major hurdles for the market were the assembly election results, and concerns over tepid growth in the domestic as well as global economy.
He expected the Reserve Bank to maintain status quo on interest rates given stable inflation and subdued economic growth.
He said a decline in bond yields was one of the contributing factors to the recent rally, but bond yields may have bottomed out for the time being, looking at the sub-par GST collections, high fiscal deficit numbers and muted growth numbers.
On assembly election results, Mukherjee said the market’s base case scenario was that the BJP will win MP and Chhattisgarh and lose Rajasthan.
"If that happens, the markets will give a mild sigh of relief and the event will be forgotten in a couple of days," he said.
"But if the BJP loses Raj and MP and wins only Chhattisgarh, then expect a backlash. The Nifty could fall a couple of hundred points immediately, and the thought of 2019 being a fractured verdict in the mind of the market could turn out to be a headwind and limit upside for the market," Mukherjee said.
He is cautious on NBFC stocks, despite many of them participating in the recent pullback.
"The turf will still be sticky for NBFCs. But because these stocks have been beaten down so badly, there is scope for a trading rally or tactical pullback in these stocks," he said.
"Going forward, there will be significant growth headwinds for NBFC, and even margin pressures. So the heydays of the last three years are clearly over for the NBFCs. One of two NBFC stocks may do well, but this is not the dawn of a new bull market in NBFCs," he said.
He is not bullish on mid and small caps either.
"Midcaps valuations have moderated a bit, but they continue to be on the higher side in the context of their earnings growth," Mukherjee said.
And he feels that muted earnings growth is a major headwind for the market as a whole.
"One of the big worries is that earnings growth is not picking up in a big way," he said.
Factors like easing crude prices would provide temporary relief, but in the long run stock price appreciation is driven by earnings growth, he said.
Mukherjee said growth in corporate earnings has been anemic for almost four years now. In the backdrop of the recent GDP and gross value added (GVA) numbers, the prospects for this fiscal did not look all that great either.
"The market is trading at 17-18 times forward earnings and earnings growth is 10 percent. Till the market is able to overcome the hurdle of tepid earnings growth, we will not have a clean bull run," he said.
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