A consolidation will be healthy in the long-term

Indian market has done well in the last two and a half months, it may consolidate from current level with a mixed bias evaluating the international and domestic developments. The extent and type of consolidation may be deeper in a short-period or just marginally tepid in a pressing time of few weeks. We expect the boarder market to be range bound in which the main indices like Nifty 50 to trade within a bracket of 10,000 -9,500 as a strong support and 10,500 as the resistance. If 9,500 is broken, the next strong support will be around 9,000 level.

In India, the domestic factors which may influence the market is the escalation of border dispute between India and China, which the market is not so concerned currently, not anticipating any fiscal and increased risk for the country due to de-escalation. Another factor  is the increase in the level of infection in India (especially in some pockets) leading to stringent lockdown in some important economic sections. At the same time, we are also hearing that the central government is keen to further open the economy in the next phase of unlocking in a couple of weeks.

So, it seems that more than domestic factors, the developments from across the world may be more important and will have implication on the trend of the market. The latest facts causing concern are; a second wave of infections in the world, noticed in US and China, and pessimism over the extent of recession and insolvencies in the future. Yes, some reports of new cases are witnessed in places which were brought under control. But the set of cases are small and the media reports are a bit exaggerated. Regarding the strength of recession, it is well known and understood that we are in a long cycle of decline in growth for a period of three to four quarters on a YoY basis. At the same time, we are also seeing month to month improvement in economic activity. In the US, risk of insolvency has reduced due to buying guarantee by FED for private bonds and household mortgage. In India, similarly, some benefits can be expected for small and medium enterprises.

FIIs have started to sell in EMs like India since the second week of the month. We saw weak economic high frequency data related to domestic flight, road traffic, PMI, vehicle registration and IIP. But such frequency monthly data is expected to be bad during complete lockdown and would improve on a month on month basis during the unlock. The selling is due to change in risk-on to risk-off strategy by shifting money from EMs equity to less forex risk US debt instrument which is now guaranteed by FED.  It was actually due to more than eligible bounce in the world equity market going back to high valuation in spite of not enough uptick in economy in the last and coming quarters. Though valuation has not increased to the pre-covid level but are high enough considering de-growth in profitability which may stay till the end of December.

In-spite of fall in economy we are not going to fall into a situation of huge losses in equity. As it is understood that this correction is not due to an imbalance of financial market, high debt or insolvencies but due to health crisis which the economic is evolving to handle in a new norm. There are ifs and buts like what will happen if second wave is dangerous and if the economic fall persist for a long-term. But currently these concerns are undeserved contenders with high risk and the world will evolve in a new normal. In India, economist and experts and forecasting fall in FY21 GDP in a range of -2.5% to as high as -10%. At the same time, they are also expecting a stronger recovery in FY22 in the range of +5% to +8.5%.