War-like situation with China or global correction could spoil party on Street: Experts

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Indian market has rallied over 5 percent so far in June even as COVID-19 cases are growing rapidly. Global rating agencies' action, weak macro trend, and the standoff between India and China are some other factors that are keeping the gains in check.

Despite the bad news, experts say, the recent rally in market, backed by liquidity, could take a knock only if there is a correction in the global market or if there is a war-like situation with China. But, still, investors should tread with caution because we could see some profit-taking at a higher level.

Twenty Indian Army personnel were killed in a face-off in Ladakh's Galwan Valley on the night of June 15-16, the Army said.

In a brief statement earlier this week, Prime Minister Narendra Modi said that India wants peace, but is capable of giving a befitting reply if instigated. He has called an all-party meet on June 19 to discuss the situation.

The last standoff between India and China was in Doklam in 2017. The situation was contained only with bilateral talks and a similar conclusion is factored in markets in 2020 as well. But, a war-like situation could hurt sentiment, say experts.

“The markets would take the India China standoff negatively only when there is a war-like situation. Although forces are almost on the war-like alert, market is still not building in the scenario of a full-fledged war as of now. Both countries need to address the pandemic issue and improve economic activity on a priority basis,” Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities told Moneycontrol.

“In June 2017, we had the Doklam standoff which went on for more than two months but since it did not escalate into any real war-like situation, markets did not correct sharply. In fact in the second half of 2017 the Nifty-50 went up by nearly 1000 points,” he said.

Full coverage on India-China border face-off

Mazhar Mohammad, Chief Strategist – Technical Research & Trading Advisory at Chartviewindia.in told Moneycontrol that if the skirmishes between India and China gets converted into full blown military action then it may not go down well with the markets.

“As long term trend is already down afresh leg of selling, in case of full-blown military action between the two nations can drag down the indices all the way down to March lows of 7500 as economic recovery process will not only be hampered but gets much delayed,” he said.

Other factors that could drag Nifty:

The Nifty50 has rallied over 5 percent so far in June to reclaim its psychological resistance placed at 10,000 levels.

Factors other than a war-like situation that could spoil the party for the bulls would be a correction in global markets, earnings downgrades, and higher valuations.

In terms of valuations, the Nifty50 is trading above 19x on Fw basis leaving out any room for upside potential. Most developed markets along with the MSCI World Index are trading two standard deviations above the 10-year average.

“Based on Bloomberg estimates even the 2 Yr Fw PE of US Indices is above the Peak of last fifteen years (i.e. on 1 Yr rolling Fw basis). US markets are trading way above in terms of valuations and there is a risk of a correction in them. We could go down along with the correction in global markets as and when the liquidity subsides,” says Oza of Kotak Securities.

The other reason highlighted by Oza is – the probability of retesting the recent low remains because earnings could see further downgrades post Q1-FY21 results, and to that extent, valuations would go up further.

Read our complete coverage on the India-China border tension.

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