This Market is Not Falling!!!

This market is not falling!!!

Equity markets saw continuous run up post a very shallow correction in October. From a low of 25,910 on Sensex on 17 October, it took barely 15 days to reach a level of 28,000. This rally hardly gave an opportunity for many investors waiting for meaning full correction on index. I feel we are again sitting on a cusp – cusp of unbelievable rally. I am trying to reason it out in a simple way.  Well, these are my guesses researched on the basis of past market behaviors and the way this rally has been shaping up.

The result season –

This result season has been more tilted towards disappointment, nevertheless there were some green shoots in major sectors as well as surprises in midcaps. On a disappointment side PSU banks were a shocker. Almost every PSU bank came out with deteriorated asset quality and provisions increased multifold, in some cases 3 times. Certain infra companies and cement companies met the expectations on the other hand. Two wheeler auto companies posted a record sales in Diwali and E commerce companies are finding 24 hours less to sale their products. Major consumption companies like Titan shocked the street with weak numbers where as shoppers stop, Vijay sales and future retail posted expansion in margins and top lines. The companies’ likes of Thermax posted a great result on the back of exports but the domestic sector was yet to pick up for them.  The Q2 results didn’t show any recovery and that has left many investors worrying. The market run up has been making many such investors feel  the valuations have run up very fast and situation on the ground is not supportive.

Government actions –

Many believe government talks of reforms have yet not been the reality. Whereas I feel this government has shown and convinced investors that It can take tough actions for the benefit of India. This conviction has added to the euphoria of FIIs for india which will not wane so easily as each one of them knows reforms can’t be equated to instant coffee.

The Modi government has rolled out some key reforms, including diesel deregulation, allowing private participation in coal mining, liberalizing the foreign direct investment regime and changes in labour laws. It has also unveiled initiatives to turn around country's manufacturing sector through its "Make in India" programme and by announcing to make submarines in India. Initiative of Jan Dhan Yojana has also been a fair success and is going to be ongoing activity. Some constructive action is also expected on land reforms. Apart from this Mr Modi’s social agendas like “Swachha Bharat” mission, “Clean Ganga” mission going to help India in long term in improving the tourism and domestic connectivity.

What is going against India –

The major negative news against india’s economy is increasing fiscal deficit for this year. We are almost at 82.6% of budgeted estimate for the year. The tax revenue collection has been tepid (I hope the black money trail is real & it may add some revenue). The expected disinvestment programme as usual may cover up the short fall.

The European economy still showing signs of weakness. Although, easing is expected in Europe but still it is more of a speculation yet. However, geopolitical scenario has been stable.

Global Scenario –

The BOJ couldn’t have timed QE better than this. The US QE has just been over but the data couldn’t have been soother than this and it is expected to be so, for some time. US FED has been assuring of no interest rate hikes unless they get a comfort of consistent better jobs data. There is an expectation of easing in Europe which may be addition to flush liquidity. Recent bygone election results in Brazil which favored pro incumbency has made it all the more not so favorite and falling commodity prices make it more vulnerable. All this has led to make India a more favorite destination which has lot many positives - Interest rate cut, pro growth government, improving consumption story, rerating candidate, falling commodity prices. India, Thailand & Indonesia are expected to be favorites.

My View –

It is certainly agreed that the growth has not picked up in India and it still needs a push. Actions like interest rate cut, additional impetus to manufacturing, improvement in ground level activity will have some impact. These all actions will result into results after some time at least 6 months. Nevertheless, everyone has to agree that this government has been taking pro growth measures, the results of the same are going to be visible in some time and patience will be the name of the game.

But, these actions certainly have created an euphoria around India, may be corporate results may not support it. But I feel the news around government actions till budget will keep the markets very happy. In the process markets will become expensive. On a forward earnings basis we are at 19 PE which is not cheap but certainly not expensive. I feel we have got a room to expand. My hunch is by April we will be around 22 to 24 PE which can have Sensex in the range of 32,000 to 34,000 and nifty around 9500 to 10,000. In this valuation range india will certainly face a risk of correction may be in the range of 20 to 30%. Its been quiet sometime we have been expensive.

Mind you, only Apple I phone is expensive because it has demand justifying its value and apply the same logic to India.

This market is unarguably buy on dips. A wait for correction may be quiet a longer one and yes there will be a correction but it may have your jaws dropped to unbelievable number on index before that.

Its my hunch!