Market seems to be in sync with economic reality; can Nifty test 7,000 soon?

After suffering losses during the last two consecutive sessions and witnessing a negative opening for the day, the Indian market benchmarks are now trading in the green on May 6.

The market is on a bouncy track and there is a fall after every rise in the market and vice versa.

For many, the recent rise in the equity market was bewildering as almost all indicators of the domestic economy had been showing signs of acute distress due to COVID-19.

However, in the last two days, Sensex has plunged nearly 7 percent and a widespread sell-off has been witnessed. Market experts are expecting volatility to continue in the market due to weak global cues, high valuations, profit-booking, weak results announced so far and no further stimulus by the government keep investors on tenterhooks.

Is the market in sync with economic reality?

Muted earnings combined with looming uncertainty over the economic situation due to extended lockdown have started haunting the participants.

It seems pertinent at this juncture to figure out if the market has finally woken up to the economic reality, and that the rally that it saw in the month of April will not be repeated in the near-term.

The market is forward-looking and it tends to factor in the possibilities that lie ahead. It is always ahead of the economy in terms of anticipated improvement.

Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities pointed out that on the front of valuations, Nifty is trading at 18.5 times on forward PE, which is very closer to the previous peaks of about 19 times.

"The recent pullback in our market is on the back of smart rally seen in the US markets, which may not be sustainable. Probability of Nfity50 going closer to its recent low is very high because of the hit on businesses and potential earnings downgrades," Oza said, hinting that the market might come in sync with the economic reality.

More than the economic reality, the market seems to be disappointed with the absence of adequate government stimulus. Besides, increasing the risk of NPAs in banks and uncertainty over consumer demand are also the factors that are keeping investors nervous.

"Indian market is experiencing facing selling pressure as the stimulus package is still under consideration. There is an increasing risk of higher defaults in the banking system post moratorium. States are hiking taxing to increase revenue that will bring more uncertainty to consumer demand that might have already gone through fundamental changes," said Sameer Kalra, Founder, Target Investing.

What will move the market?

COVID-19 is the biggest factor that will move the market, followed by government stimulus and economic indicators of the country. Global cues, too, will have their say in the market.

"In the near-term, we expect the market direction to depend on the spread and intensity of COVID cases, and incremental government and regulatory actions to restart the economy," said Siddhartha Khemka, Head - Retail Research, Motilal Oswal Financial Services.

Pankaj Pandey, Head of Research at ICICI Securities said the initial wave of selling in the market during March was led by the heightened level of fear which is largely done with.

He believes the market will largely react to domestic factors going forward. Global news and stock-specific movement was also there.

"While we assess the magnitude of collateral damage which COVID-19 is going to do to a number of companies and sectors, it has not yet been fully factored in by the market. So, the market will continue to see volatility for at least the next 3-6 months," Pandey said.

Pandey, however, does not expect the market to fall to the levels of 7,000 as the phase of peak fear is behind and the volatility index India VIX has also cooled off. He expects 8,800-9,800 levels in the short-term.

Experts are mixed in their views on the level of the market.

Kalra of Target Investing believes the market may go even below 7,000.

Aamar Deo Singh, Head of Advisory, Angel Broking said the market appears to have factored in a lot of the negatives, so it appears that 7,500 should act as a very strong bottom in months to come.

"However, if the lockdown across the world and the coronavirus scenario worsens, then, in that case, the market could witness serious pain," he said.

G Chokkalingam, Founder & MD, Equinomics Research Advisory, sees about 10 percent correction from the current level.

"Domestic economic reality is the biggest trigger for the market at this juncture. In the short-to-medium term, the market is expected to tread water. However, in the long-term, the India growth story is intact," Chokkalingam said.

"Investors should remain stock-specific and should focus on companies that have been less impacted by COVID-19 such as pharma and select FMCG stocks," he added.

Uncertainty will continue to prevail in the near-term. Investors should maintain a 'bottom-up' approach, experts suggest and use correction to accumulate quality names in a staggered manner.

Disclaimer: 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.