View: Market tired in short term but long term bull trend intact

Sanjiv K. ChainaniValue Line Advisors Pvt. LtdWorld-over equities are on a roll due to ongoing risk-on trades globally. This is driven by ample liquidity. Emerging markets (EMs) are enjoying their pie of global fund allocation, driving markets higher. Indian equities are on an uptrend for over five months, and have not seen any meaningful correction after hitting 52-week lows in Feb 2016. This long rally in Indian equities is clearly showing signs of fatigue.Even the blockbuster passage of GST Constitutional Amendment Bill unanimously in Parliament failed to bring cheers to the Indian markets as news was already discounted by the investors. Nifty reacted mildly to the event closing flattish post this announcement.The announcement by Bank of England (BoE) to provide stimulus to cushion its economy from the aftershocks post Brexit vote brought back cheers to the already tired markets. BOE has indicated further easing to shield its economy from major slowdown. Other major developed economies too are providing stimulus through bond buying programs to give boost to their economies. There is high speculation about further stimulus coming from China after weaker-than-expected July macro data.The expectation of these stimulus measures is giving further wings to the risk-on environment. This flood of liquidity is finding its way into the global financial markets, giving air to the risk-on environment. US equities hit record highs on back of easing central bank outlook across the globe.The emerging markets too are getting their share of fund allocation, driving their equity markets higher. According to Timothy Moe of Goldman Sachs, Asian equities have seen USD 17 billion of FII inflows since Brexit lows. The fund managers look under-exposed and may be forced to chase the markets. Countries like Taiwan, South Korea, Indonesia and Thailand have received USD 5.48 billion, USD 3.9 bn, USD 1.3 billion and USD 1.2 billion in July. Indian markets have received nearly USD 1.8 billion.On a shorter timeframe markets are looking tired and may take breather in the near term. Most positives are already factored in. Indian equities have run up by over 27 percent from Feb-2016 lows of 6,825. Investors are apprehensive about the stretched valuations of Indian markets vis-à-vis other emerging markets. India is quoting at substantial premium to emerging markets.The corporate results were a mixed bag – not very encouraging, but balance sheets are on the mend. For these valuations to sustain, it is important for fundamentals to catch up with the prices.The passage of GST has paved way for India’s biggest reform since liberalization, but there is still long way for that to be fully implemented. The government has set an ambitious target of implementing GST from 1st April 2017 in totality. But considering that it further involves multiple other challenges, the deadline seems too optimistic. The real benefits to the economy from implementation of GST are at least 2-3 years away.As expected, RBI has maintained status quo in its August Monetary Policy, as it sees upside risks to 5% inflation target for 2017. To counter inflation risks, government has unveiled a 4% inflation target (+/- 2 percent) for next five years under policy framework with RBI which bodes well for the financial markets. All the major events are out of the way and most positives are already factored in for the Indian markets. In the near term, markets could show tiredness and may consolidate before the next up move.Overall investors’ appetite for Indian equities is strong. India continues to remain largest overweight in Asia. The macro-economic fundamentals and demand scenario is steadily improving with above-average monsoons. The implementation of Seventh Pay Commission will have positive impact on the economy. The economic data came better than expected with industrial production and manufacturing PMI showing strong improvement. In the otherwise gloomy global environment, India continues to remain the shining star. It is one stock which should be ‘Long Only’ in any portfolio. The real potential of the country is yet to be unleashed.‘The author is Managing Director of Value Line Advisors Pvt. Ltd. a Category I Merchant banker. He can be reached at sanjiv@valuelineadvisors.com’Disclaimer: The views expressed in this article are personal and the author is not responsible in any manner for the use which might be made of the above information. None of the contents make any recommendation to buy, sell or hold any security and should not be construed as offering investment advice.