Market Outlook by Vinod Nair – 30 November


Market’s short-term rally is looking positive as the downtrend in crude prices is having a positive impact on the domestic fiscal. Additionally, India’s earnings downgrade post Q2 results is over and valuation has got more rationale with a positive outlook from H2FY20 onwards. The sudden fall in oil prices from a peak of $86.7 due to increased supply from US and limited effect of Iran sanctions. In the near term oil prices can bounce from current levels given an expectation of production cut by OPEC in December meeting, however, on the slightly longer-term perspective we expect oil prices to trade lower since supply is likely to increase. Expected volatility in oil prices during December, FOMC meeting in the same month and outcome of upcoming state elections and the national elections next year may be a worry in the near-term. The most important factors which can define the outlook of emerging markets like India will be global trade war situation, pace of interest rate hike in the global market in CY2019 and degree of slowdown in the world economy.

RBI is likely to keep the key policy rates unchanged at the monetary policy review meet on 5th December. Robust agriculture production, softening of vegetables and fruits prices and the government’s new procurement policy will help in keeping the food inflation under check. Risk emanating from crude prices has eased, CPI inflation is expected to be under the control range, RBI is likely to lower its inflation forecast. The return of foreign investors to Indian markets, stability in rupee, strengthening of industrial production and benign inflation have supported expectations of economic growth revival in the future. However, bad assets and tightening of non-banking regulations might lead to disruptions in the short-term.

Post Q2 results, market has cut the earnings growth of FY19 from 20% to 15%. The actual growth of Nifty EPS in H1FY19 has been around 5% to 7% with a further risk of downgrade in Q3 and Q4 given the near-term headwinds in the domestic and global economy. At the same time performance of the market during the year has been muted, due to which valuation has also got rationalised, one year forward P/E has reduced from 19x to 16.5x. Given the fall in quality of earnings during the year, results are unlikely to surprise in the short-term but given a correction in valuation and tailwinds from fall in oil prices, the extent of impact may be limited in the short-term.

We believe that large-caps provide a better chance of investment in the long-term given the healthier risk-reward ratio. Whereas mid and small caps have the higher risk of downgrade in earnings and valuation in the future. Certainty and stability in business will be the key for the market to outperform in the current situation. FMCG and consumption oriented, IT and possibly pharma too, assuming that the worst is over in terms of pricing issues in the US market. At the same time, we also feel that export-oriented stocks and sectors like chemicals and auto ancillaries can also do well. The sectors which are likely to be under pressure in the near-term are ones with lack of financial stability such as financials, NBFCs and infrastructure.



  1. Still waiting for a response:
    Why India should buy crude on spot?
    Why India should pay $80 a barrel for Saudi crude where the cost of production is barely $10.
    Are China and Japan buying this way? Definitely not. They cannot be “Brented” like India !!

    • India’s domestic Oil resources are very limited. We largely buy on a long-term contract basis, the price of which depends on the demand & supply of the commodity. India has to import more than 3/4th of the domestic requirement and oil being a global commodity its price cannot be predefined. Its price impacts all the dependent countries like India.

  2. Hi Vinod,

    Nice article. However, there are few things that are missed in this article which should be looked at before pronouncing any verdict. Firstly when you say that the forward earnings have rationalised, it is respect to what? You mentioned that forward PE had moved from 19x to 16.5 x. Is this Cheap? There is something called as Base Effect. To understand that, we need to know what the forward PE of India has been since the indexes came into existence. The article then needs to compare where the current fwd PE is compared to historical averages. Only then can you claim things are rational or not. I am sorry if I sound harsh but just thought of pointing out this glaring error in this article. Things do not get rational or irrational based how we did in past 12 months. We cannot ignore Base Effect. That is the one that dictates how the world works.

    • During the last one quarter, the valuation has got reasonable from a high of 19x to 16.5, due to muted earnings growth in H1FY19 and headwinds in the global & domestic markets.
      • Now valuation is near the 5yrs average of 16.2x.
      • Due to lack of earnings growth in the last 2yrs, India’s valuation maintained its lofty level led by positive inflows from FIIs and Mutual Funds.
      • As a result, valuation did not completely reflect the fair level of the broad market, it was skewed on the higher side for some stocks (blue-chips) & sectors while very low for many.
      • In a nutshell, the valuation of main indices was high in the last 1.5yrs while strength & momentum of the broad market was weak.
      • Today we are seeing some sanity in the valuation, a trend which may continue for some more time.

      This valuation is not cheap, the last 5yrs range is 19x to 13.5x with an average of 16.2x. Please note that this is based on hindsight while future earnings forecast continue to be on the higher side providing a tilted view on the current valuation. A further consolidation in the Indian market or valuation will depend on volatility in oil price post OPEC Dec meeting, FOMC meeting in Dec and implication of state election results in Dec, which are some worries in the near-term. While the long-term outlook of India will depend on global trade war situation, pace of interest rate hike in the global market during CY2019 and degree of slowdown in the world economy.

      Thank you for your query, this space is a short commentary based on the weekly trend of the market. Please do see our Geojit Insight magazine which illustrates a more long-term outlook on the market and updates our market view & outlook on a monthly basis.


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