Friday 24 April 2015

Equity Market - A Big Picture




The Indian stock market has been among the best performing markets in the world, with Sensex rising by 26 %, index being 22386 on 1st April 2014, and 27957 on 31st March 2015. The Nifty rose by 27%, index being 6704 on 1st April 2014, and 8491 on 31st March 2015. I believe, this enormous massive run of the Indian markets will continue in the coming years on the backdrop of pending reforms, just concluded Telecom Spectrum Sale and Coal Block Auction. Immense drop in the Crude oil prices have played a positive role for the Indian economy in form of savings of foreign reserves. RBI has been playing a major role for pushing the economy to up-ladders by stabilizing the Rupee versus the dollar. Furthermore, The Reserve Bank has also very well managed the inflation and interest rates, by cutting down some very important rates from time to time being Repo Rate or Statutory Liquidity Ratio (SLR). This move of the RBI has managed to maintain enough liquidity in the economy. The BJP-led Union Government has managed well with control in fiscal consolidation, and bringing in some required reforms such as FDI in insurance sector up to 49%. However, the pending GST Bill and Land Reforms Bill are yet to make their mark in the economy.
The some-what stabilized US Economy gives a sense of relief as far as global markets are concerned, however, the Euro Zone still seems to be a concern with Greece unable to cope-up with the rising debt, and the Middle East war-rift still on a rise. Macro economic problems such as corporate earnings not expected to do well in the near term, unseasonal rains affecting the crops may arise. The Bleeding Non-performing Assets (NPAs) of the public sector banks comes forth as a macro issue concerning the economy, since banks with higher NPAs would be reluctant to reduce the interest rates for their customers, even though RBI lowers the rates by some basis points. Pharmaceutical companies may get a hit-back due to reasons pertaining to patents or drug contents by FDA, US. Information Technology companies may get affected if rupee appreciates or falls below 61.

Market Technical's
Analysing the markets from a PE (Price to Earnings per share) perspective, the markets (Nifty) are currently trading at a PE multiple of 23.5 (Nifty 8700 / Earnings 373), a year forward i. e 2015-16, expected PE looks around 20.5 for Nifty, and for 2016-17, its trading around a multiple of 17. Hence, market looks rightly priced. Historically, we have observed that markets are reluctant to go below a PE multiple of 17 and hence, with the current earnings, in the worst case possible scenario, the Nifty is not likely to go below 7300. However, in the intermediate term, a PE of 19 seems to be a good floor and Nifty may find support around 8100.
Whereas charts are concerned, all the major price trends for the Markets are up, and currently in absence of any major triggers, markets will remain in a broad range between 8500 and 9000 on the Nifty. Technically, trade and close below 8500 will see sharp corrections in the markets and Nifty would test 8000 levels. However if Nifty holds 8500 and convincingly breaks out above 9000 with volumes on close basis, it will witness a sharp rally and in that case it would test 9400 initially, and perhaps 10000 plus going into next year.

Take-away 
Going forward, markets will be very stocks specific. Healthcare and Information Technology sectors were the star performers in past. They may also do well but not as much as it did in the past and could at best be market performers, reason being slow down in Europeans markets and strength in rupee. This will keep the sectors under check. However a turnaround in Oil & Gas, Capital Goods and Infra structure sectors is very likely. These are good times to remain invested in equity markets. Long term investors will certainly get good returns, far more than the Bank deposits and other Debt instruments. 



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