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Where To, From Here?

Monday, May 04, 2015
By Mayura Shanbaug & Dominic Rebello

Bear Grip on the street...

The bullish phase which started prior to the Loksabha election in 2014, has been correcting since the last eleven sessions. Whether it is technical correction or the markets are entering a bear phase is the question we put forth to the panel of experts. Many believe that every bull market has a phase of correction and the current one is no exception. However, there are others who feel that issues such as FII taxation coupled with fading optimism about the promised reforms and fears of a weak monsoon are playing truant on market sentiment. So where are the stock markets headed?

The Indian markets had gained about 30% in 2014 on hopes of the newly elected government reform moves would boost the economy over the past year. However the euphoria seems to be dying down and pessimism seems to be taking its place. And amidst this recent volatility, even experts are differing in their short views, but almost all are confident that the underlying trend remains structurally bullish.

Says Clifton Desilva, Director, Altina Securities, the rise was more on expectations rather than any major change in fundamentals and therefore it was logical to conclude that a correction was due. “The recent drop in the market is an overdue correction,” he says.

In the last few weeks, the Indian markets have slipped from their recent highs, falling close to 10% from their peak values in 2015. “Triggers that have led to the fall are the issue of FII taxation, (MAT) a fading optimism about the promised economic reforms, earnings concerns, fears of a weak monsoon etc.., says Desilva.

Kamal Poddar, Managing Director, Choice Group, has a similar view and believes that every bull market has a phase of correction and consolidation and the current Indian market is no exception to this rule.

“The ongoing correction in Indian market is a mix of negative sentiment driven by MAT news along with the technicals. However, we cannot term this as a bear phase and would restrict it to a correction, which is a natural corollary after a long sustained bull phase that we have witnessed in the past one year,” says Poddar.

Poddar feels that the market led by investor and traders have over-reacted on the issue of MAT, while the FIIs shifted their investments from India to China that compounded the decline on the Indian bourses.

It is believed that Chinese markets were declining on fears of a slowdown and FIIs found their valuations more attractive in relative terms to India leading to the shift in investments. Hence amid all this mayhem, Indian markets continued to discover lower support levels every day.

“Bull market corrections are sometimes fast & furious,” says Devang Mehta, Sr. VP & Head- Equity Advisory, Anand Rathi Financial Services. “It seems to be a technical correction as there had been a sharp run up. We are in a structural bull run and intermittent corrections will be a characteristic going forward,” he says.

Hemen Kapadia, CEO, Chart Pundit feels the market had started its uptrend over the last couple of years specifically from August 2013 and that without any major price correction taking place; so it’s not a strange phenomena for the market to consolidate/correct by moving downwards and because of the fast run up, profit booking at 9000+ levels has led to this correction.

“The volatility which has accompanied this correction is also due to various non technical, but geo-political issues. The nifty has moved up from a low of 5119 so even if this correction takes the nifty to below 8000, that would not qualify as a bear market,” he says.  

“A 4000 point rally followed even by a 2000 point correction (to 7000) would only be a 50% retracement and not a bear market (this is not to suggest that the Nifty is heading towards 7000),” explains Kapadia.  

But there are others like Nilesh Shetty, Associate Fund Manager-Equity, Quantum AMC who feels that the mismatch between earnings expectations and actual delivery has been the main catalyst for markets to correct.

“If the FII flows continue to remain strong then the correction could be short lived, but if there is any reversal of flows due to global macro issues or local issues like lack of clarity in taxation then the market correction could be deeper,” he says. In the last few months stock prices and valuations went up quite high, mainly on expectations of a major revival in the corporate earnings growth.

“The FY15 aggregate earnings growth has been in single digits, much below the earlier expectations. With the outlook for the first half of new fiscal (1H FY16) bogged down by unseasonal rains and no-signs of a capex revival in the private sector, the earnings growth visibility for FY16 is not very clear and  stock prices / valuations are just aligning to the lower earnings reported by the corporates,” says Sachin Shah,  Fund Manager, Emkay Investment Managers Ltd.  

Shah feels that the markets should hold around Nifty levels of just about 7800 -8200 for the next few months. “Once there is clarity on the oncoming monsoon season, revival in capex could be initiated by public sector and eventually followed-up by the private sector and then once again the markets could start moving up,” he says.

Shah says that for retail investors it’s a good time re-start SIPs in good MFs for next 12-24 months.  Stocks from the private banking sector, selected power utilities, high quality pharma companies, auto & auto-ancillaries offer good investment opportunities,” he advises.   

Similarly, Desilva also feels that the various reform initiatives undertaken by the government will yield results over a period of time. ”The economy too is on the revival track and the long term outlook appears promising and therefore the markets are poised for a rise over the long term period,” he says.
According to him the return on the Nifty could be in the region of around 10% to 15% over the next one year, whereas the downside is limited and could be in the region of around 5%.

Desilva feels that with the revival of the economy, almost many of the sectors would do well, but most specifically the focus should be on autos, pharma, Information technology, banking to name a few.

“In the auto sector, Tata Motors, Maruti Suzuki, Mahindra & Mahindra, In the Pharma sector- Sun Pharma, Cipla, In the Information technology sector Infosys, TCS, HCL Tech, Mahindra Tech and Wipro, In the banking sector HDFC Bank, ICICI Bank, YES Bank, Axis Bank, IndusInd bank in the private sector and State Bank of India and Bank of Baroda in the public sector,” he says. His advice to the investor is that the emphasis should be on investment and not speculation and the focus should be on quality stocks with proven management.

Devang Mehta remains very positive on Indian equities. An “18 to 20% CAGR returns for the next 3 to 5 years looks quite possible on the indices and individual stocks can even outperform,” he says.

“There is a clear cut polarization in terms of earnings growth. Private Banks have been posting good to great numbers, while its public sector peers have still not seen earnings momentum. Even amongst the same sector, companies have been showing diverse performances. Banks, NBFCs and Auto will be beneficiaries as the interest rate cycle is headed downwards. Infra and Capital goods can be the dark horse going forward. Pharma which has consistently shown good earnings growth will still command some premium. Beaten down front-line IT stocks, after a poor quarter in terms of earnings present a good opportunity too, says Mehta.

Kapadia's advice to retail investors is to participate, as if the reform process continues, then equities as an asset class should do well and would be the best hedge against inflation. “An SIP based mutual fund approach spread over a minimum of 5 years (longer the better) should give them decent if not good returns,” he says.

“In the short term, there is decent support around the 7850 – 8000 level which could act as a cushion and limit the fall for the time being. From the long term point of view, one gets the feeling that the bull market is still in motion and counting. So a price level closer to 10000 for the Nifty towards the end of the calendar year seems like a distinct possibility,” says Kapadia.

Poddar also feels that the correction in the market has given an opportunity to re-enter at lower levels in sectors like infrastructure, banking and power that will spearhead the rally when restored. “Few stocks like SBI, Axis Bank, Man Infra and NTPC are seen attractive from a risk-return ratio, given the current correction in the market,” he says.

Poddar feels that in the short term, we see a support for Nifty at 8050 levels and if it breaks this level then it may decline further to 7800 levels in the next 3-4 weeks. But the long term outlook remains bullish for the upside targets of 9500-10000 levels, which would be approximate rise of 20% in the next 6-8 months.

“The upside voyage of the Nifty is based on the strong fundamental story which is substantiated and reflected in the monthly economic indicators.
Inflation is on the decline that will compel RBI to reduce interest rates and encourage investors to opt for the equity route. Global economic scenario too does not augur well and that may force FIIs to explore the Indian markets again from a long term perspective,” he says.

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