The general trading funda is that markets run on forward earnings projections rather than trailing numbers. Stocks are trading higher than average valuations ahead of their fundamentals and Nifty is trading at a record premium. Similarly, if one considers the present level of stocks as expensive, one can argue that can't it be more expensive? In other way round, if the market is less expensive, then it leaves scope for another question- can't it be more cheaper? There's no doubt that the present level of Nifty is expensive, but it may continue its upward trajectory if the earning numbers are attractive in the forthcoming quarters. When Sensex reached 20,000 points and thereafter for every addition of 5,000 points, we felt that the market was expensive. Regardless of such perception, the markets moved up in an unabated buying support. So was our perception about expensive stocks, P/E ratios, etc. And 2021 will definitely be a better one when compared to the pandemic year of 2020, which witnessed a significant rally of market bellwether BSE Sensex from 25,000 points to near to 50,000 level, almost doubling in just a short span of 10 months.
The weighted average of Nifty-50 club is hovering at 400 level as the NSE's broad-based index is 14,000 points. If we recall the weighted average of Nifty earnings 20 years ago, it was 73 and the index was at 1,260. Now, the earnings average is 400 and Nifty is at 14,000 level. Nifty soared along with earnings. Based on this assumption, Nifty will move up as the corporate earnings improve over a period of time.
Further, the 14-day RSI was hovering at 62.5-70 from the highest of 81.46 on January 14. Generally, RSI between 55 and 75 is considered as a bullish condition and an overbought zone begins above 75 level. Sensex is making higher top-higher bottom on weekly charts. Encouraging Q3 earnings, US stimulus package and FII inflows may sustain the upward movement of key indices, forecast the analysts. This is further supported by Williamson%R(14) as it’s hovering at 47.19 as the momentum indicator in the range of -20 and -50 is considered as a bullish condition. It coupled with a positive dose of Budget, let’s hope so, may take the BSE Sensex to next 51,000 level.
Though Sensex skyrocketed over 90 per cent in the last 10 months from the low of 25,981.24 points on March 23, 2020, which was solely due to the lockdown, the real growth was 7,672 points or 18.47 per cent, from 41,528.91 level on January 20, 2020, to the current 49,200 as on Tuesday (January 19, 2021). The benchmark indices -BSE Sensex and NSE Nifty- fell over two per cent in two sessions owing to profit booking and weakness in the global markets, and staged a smart recovery on Wednesday. More importantly, the recovery from March 2020 lows has been gradual and the market analysts term it as a healthy sign for the next rally. Similarly, the Nifty was moving in sideways from December 2019 with undercurrent weakness. Then came the coronavirus outbreak and subsequent lockdown that acted as a major trigger for the huge crash. Sudden crashes or fast recovery can’t sustain. At the same time, slow downfall or gradual uptrend can last longer. The latter is visible in the market now. The growth from March 2020 low has been gradual and 45 degrees. So, we can say this is a healthy sign and one can be positive about the future course of trading.
After profit booking for two sessions, key indices recovered over one per cent and were trading in positive zone on Tuesday (January 19). The US stimulus news was boosting the market sentiment as it’s expected to buoy the global economy. On the other hand, crude oil prices were also moving up. Brent crude futures (March expiry) are trading at $55 per barrel. Nifty has a resistance at 14,600 and if it breaks it, then the next level would be 14,900 points. On a flip side, Nifty may decline to 14,100 points. The coronavirus relief package by the new US government will act as a big boost to the global markets. Further, European Union (EU) is keen on fiscal measures to support the economy and may announce new packages for post-pandemic recovery.
So far, the FII inflows supported the market’s upward journey and now it’s slowing down of late. Further, profit booking on Friday and Monday pulled the key indices lower. However, the massive $1.9-billion stimulus from the US government has turned out to be a major breather for the global markets. Further, the US Federal Reserve hinted that no interest rate hike now. Global central banks pumped funds into their economies to ease off liquidity crunch as the Covid-19 disrupted the economic activity globally. Moreover, the weak US dollar further helped emerging markets (EMs) get more and continuous inflows of FIIs.
FIIs in 2020 infused over $23 billion into Indian equities and about $2.5bn so far in January 2021, while domestic institutional investors (DIIs) were net sellers as DIIs offloaded Rs12,300 crore in January so far and about Rs35,000cr in 2020 year. The market sentiment globally is also positive of late after Beden was elected as the US President. Considering this, Morgan Stanley increased its forecast on MSCI Emerging Markets Index to 1,330 by December 2021 from the current 1,250 level. As the indices were dancing to the tune of FIIs, India’s correlation to the global markets rose to 80 per cent now from zero per cent in the first quarter (Q1) of 2020.
Indian market became an idiosyncratic platform as a gamut of factors including NDA government’s policy support, vaccination drive, coronavirus stimulus packages, quarterly earnings, real estate and robust agriculture, etc. Unless the quarterly earnings in the near future are not supportive, then we can’t expect sustainability of the rally on the Indian bourses, observe market analysts.
Pricing In Good News
The domestic investors prefer to book profits as the indices soared over 90 per cent in 10 months. Another major reason for reducing their exposure was that the domestic market had already priced in the good news of US elections, stimulus, vaccination exercise, etc. The overbought zone of the key indices also further reduced the undercurrent bullishness in the market. The one year forward price to earnings for Nifty is hovering at a 45 per cent premium against the 15-year average. It’s almost 23 times and a record premium we have never seen so far, remarked a Hyderabad-based broker. The market analysts opine that US dollar and FII inflows will dictate the next course of movement on the bourses. Coming to the overbought zone, it’ll depend upon the FII inflows. Volatility index VIX rose 22 per cent in January so far and is hovering at 24 level. Technically, if Nifty slips below 14,125 points, then we can expect a reversal movement and short-term bearish mode in the market.
The domestic markets may witness volatile trading until the Budget announcement takes place on February 1, 2021. The so far positive Q3 numbers coupled with vaccination drive will boost the investor sentiment. In addition to this, Union Budget-2021 will be the deciding factor whether the rally so far can sustain or not? The Union Finance Minister Nirmala Sitharaman recently held a meeting with the representatives from the industry and business sectors and sought their suggestions on measures to revive consumption demand and bring back normalcy in the domestic economy. Analysts predict a major boost in the Budget for the infrastructure sector and it’ll boost the cement, steel, other building materials and real estate sectors. After suffering negative GDP growth rate of over 22 per cent in 2020, India is expected to post -6% (negative) growth for FY22 followed by a double-digit positive growth in FY23. Considering this, the Indian industry is urging a strong policy support to ease off the adverse impact of Covid-19. On the other hand, the dragon country posted 2.3 per cent GDP growth in 2020 as its economy grew 6.5 per cent in the fourth quarter (Q4). This helped China return to pre-Covid level with a V-shaped economic recovery. This robust performance made China the only nation in the world that witnessed a positive GDP growth in 2020. Indian government may hike the taxes to enhance revenues impacted by the Covid-19.
Have large-cap stocks lost steam after the stellar run for 10 months? The answer seems to be ‘no’ as market pundits forecast a continuous rally among major scrips.
“Forget about the US and other western economies, Asian majors India and China will rule the markets in the next five years, said an analyst, who sees a robust near future rally once the uncertainty about post-coronavirus vaccine and revival of the economy is cleared. Once the economy recovers and reaches to pre-Covid level, then not only large-cap stocks in IT, FMCG and pharma sectors, but also other scrips across the board will gear up and gallop with the positive trend. If India Inc manages to post 20 per cent average earnings growth for FY22 and FY23, then one can expect another similar growth for the key indices on the domestic bourses,” forecasts the analyst, who’s upbeat on potential rally in large-cap stocks in addition to the stock-specific rally among mid and small-cap equities. India may attract $15 billion worth inflows from emerging markets as the consumption of millennials is expected to drive FMCG, entertainment, consumer electronics sectors. Insurance, automobile, chemical and telecom stocks started moving upwards. IT stocks have been bullish these days and may witness a minor correction. Equity analysts expect positive Q3 results from mid-cap stocks and revival of activity in real estate, housing and festival demand will support them.
If any stricter norms are announced in the Budget-2021 for lending in the domestic banking, then banking and NBFC stocks will get affected. Because, RBI may direct NBFCs to maintain statutory liquidity ratio (SLR) and cash reserve ratio (CRR), said a banking expert.
US, EU markets
The world’s largest economy and European Union (EU) bloc are still suffering from the coronavirus pandemic. Health experts predict a India-like situation in the US and the EU by April. Once the vaccination brings normalcy in life in the US and the western world, then it’ll buoy the global markets and we can expect a huge rally that will further infuse more steam into Indian equities. The consumer spending will also gain momentum once the day-to-day life returns to normalcy. This will further boost FMCG, aviation, banking and entertainment stocks. However, if the US-China tussle again surfaces during the Beden regime, it’ll dampen global market sentiment. The second wave of Covid-19 may dampen the economic recovery process and keep the investors in wait and watch mode. In overall, the analysts caution investors to be cautious over the next course of movement as stocks are overly extended on short-term charts, weakness in the global markets, second wave of Covid-19 in western part of the world, soaring India VIX and forthcoming Union Budget-2021.
The writer is a business journalist with 27 years of experience