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Brace for more correction in equities

Author: JK Jain/Saturday, March 17, 2018/Categories: Cover Feature

Brace for more correction in equities

The non-stop rally of Indian markets  has halted in the first two weeks of February after the elevated levels of disappointment in the union budget has triggered sell off in the first five days of the  month. Later, the selloff in the global markets has triggered the first 1,000-point correction on Nifty over last 14 months. Market participants chose to liquidate their holdings after the FM’s proposal to impose LTCG Tax.Lack of major announcements for listed companies has also made participants to cash out their profits which were made over last few quarters. The government's move of retaining securities transaction tax (STT) along with imposition of LTCG has disappointed most of the market participants. Even the probable slippage from the fiscal discipline towards next year has also hurt the positive sentiments.

Though most of the global indices have rebounded smartly towards the end of February, the Indian markets failed to participate in the recovery rally on account of weak domestic cues thereby remaining an underperformer YTD (year to date). Notably, it is more of the global commodity rally which is triggering the other emerging markets to rise and making them to outperform our markets. Indices like Brazilian Bovespa, Russian RTSi have erased around 60% of their recent losses whereas Dow recouped more than 50% of its recent decline.

Even demonetization didn’t dent markets

Even though we outperformed other markets in the month of January, we underperformed by remaining in the range after a steep fall in February. We have recorded one of the worst series over last one decade in terms of absolute points  with a decline of more than 650 points in Nifty. Even in the month of demonetization, i.e. November 2016, we did not lose this big. Global fears like US Federal Reserve could be more hawkish for the current year,and spike in global bond yields have allayed the positivity. While domestic instances like widening of CAD (current account deficit), spike in our domestic bond yields, deprecation of domestic currency, fraud in Punjab National Bank, and warning by global index provider MSCI have elevated the negative sentiments.

On the earning front also, nearly 75% of the Nifty 50 companies have reported decent set of results which were in line with the analyst estimates for the third quarter. Lack of major positives in the numbers also made participants to cash out their holdings. However, revenues have improved across  major sectors which can be seen as positive for now. However, most of the PSE’s (public sector enterprises) failed to deliver.


Key risks like sustained rise in crude oil prices, rise in global inflation and spike in global bond yields, current and fiscal deficit slippages, domestic currency depreciation, volatility in foreign inflows, lack of fiscal maneuverability due to election year ahead could make equities more volatile and won’t be as easy to make money like one would have done in the year 2017. And for now, as most of the domestic news flow is out, the focus would now move to global market news flow and we shall move to the tune of global cues. Even though international markets are holding up, we have decoupled negatively, which indicates further weakness may be on the cards. Thus one should approach cautiously and wait for decent correction to pitch into equities and preferably to quality stocks which has shown growth in recent numbers.

The current phase of correction in the markets is on account of domestic factors. Especially, our macroeconomic story might no longer be as strong as what it was a year ago and is likely to be on a dull note for next few months. However, the microeconomic fundamentals are growing stronger. With the change in the recent macro conditions, relative attractiveness of India has dimmed and the foreign players are pulling out money from India. Under this kind of environment, participants should focus more on the stocks specific front instead of taking a broader call on the index or the market. One can look for strong stocks that will benefit from the domestic cyclical recovery, rupee depreciation, housing market recovery, and government’s focus on rural growth.

Markets always mean revert from certain zone of valuations and price move. On the midcap and small cap front, for now over last few days, we are witnessing that  this mean reversion trade is panning out. Though we have seen decent correction in most of the mid and small cap stocks, but we need to remember that most of the stocks had run ahead of fundamentals, with some cases where the prices had multifold in the last one year alone.Still the valuations are high, indicating more room is left on the downside. Hence, we would not recommend touching those counters right now. Technically, these highly corrected stocks are trading well above their mean prices over longer period of time.Hence for near term, there is a high probability of these stock prices declining towards their mean and may also slip below the mean for a short period of time, thereby normalizing the excess price move.

On the charts of Nifty 50, for now 50 days moving averages zone is acting as a supply zone and its multiple attempts to conquer 10,620-10,660 zone failed indicating bears are still in a commanding position. For now, there is a high probability of time wise correction at current levels in the broader range of 10,250-10,700 levels over the next few weeks.Any strong move below the 10,200-10,250 levels shall trigger more corrective move towards the 200 days moving averages zone which is placed around 10,000 levels, and may even move below it. Hence the strategy for now may be to utilize the rallies to lighten or even short until the levels of 10,650-10,700 is taken out.

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