The market’s sentiment has been weak during the last four months. Nifty50 had fallen by 12% from the all-time high of 12,100 on 3rd June to a low of 10,640 on 23rd August. In the last two months, market has been consistently trading below the 200 daily moving average, hovering within a narrow range of 10,650 to 11,100. Market was trading within this thin margin to comprehend the global and domestic developments being worked on to revive the slowing economy.
Globally, there is an ease in tension between US and China regarding trade war as additional trade cess was put on hold providing a headroom to improve the trend of global market. This measure is short-term in nature while the final direction will depend on the outcome of next meeting which will be held in October. Last week, ECB had cut the interest rate and increased its quantitative easing plans and will continue the process till the liquidity improves. While focus has shifted to the FED outlook on interest rate as to whether they will consider cutting rates in the future, the market is hoping for the best.
We had a set of positive developments in the global market. However, sudden jump in oil prices and gentle third stimulus plan of the government did not enthuse the market. Brent had zoomed to $69 from $60 due to escalated war like situation in the Gulf and supply constrains from Saudi. India was hugely benefiting from continuous fall in crude prices led by reduction in fiscal risk, consumer inflation and cut in repo rate. The possibility of such gains in the future have been reduced post the sudden hike in oil prices.
The third stimulus package announcement was under the radar of the market. It is more towards uplifting exports, housing finance and others. To see an immediate benefit in exports, firstly, the world economy has to improve. And secondly, such incentive will have a lag effect in the economy as measures are implemented only by the end of the year. Regarding housing sector, the incentive was targeted towards affordable housing which is not the problem area today but the luxury segment is. Overall, these announcements have not completely changed the sentiment of the market since they may not address the slowing economy in the short-term. For immediate benefit we needed fiscal expenditure while monetary policy will take time and benefit the industries only if economy improves. Having said that, the government had announced three monetary stimulus plans which will benefit the economy in the medium to long-term as the economy stabilises. However, the market has circumvented this announcement and is moving negatively as per the escalated geo-political issues in India and abroad, weak economic data which is impacting the sentiment of investors towards equity class.
Given the weak trend, we have analysed the short-term scenario based on the last five years’ valuation. Firstly, we cut the consensus earnings forecast of Nifty50 to 10% from 15% expected for FY20. And imply a five year best and worst one-year forward P/E of 19x and 14x to arrive at a range of 12,500 to 9,300 for Nifty50 as the best and worst level in the short-term. Currently, market is trading at the middle of this range. Given the risk averseness, market will trade with a negative bias in this range during the short-term.
Posted: September 20, 2019.