Market Wrap: 16/11/2016
(16:30)
Nifty
Fut (Nov) today closed around 8100, almost flat (-0.23%) after the opening
session day high of 8168 and late day low of 8065 (the opening minutes low of
8040 may be an act of fat finger).
Indian
market today opened higher at around 8130 (+31 points) on the back of stable
Asian Cues supported by overnight weak US economic data and some drops in
DXY/bond yields coupled with BOJ’s offer of “buying unlimited bonds” at fixed
rate operations (although it finds no seller !!).
But
despite there was no fresh “EM currency carnage”, Indian market did not sustain
the initial positive momentum and eventually fall down to close in slight
negative in a classic example of “dead cat bounce”.
It
seems that, no one want to be a “hero” in catching the “falling knife” in the
current market scenario, where confidence of all the stake holders on the “Real
Street” as well as the “Dalal Street” has shaken as a result of this NAMO led
demonetization and “war on the black money”.
The
effect of this “surgical strike” on the “parallel economy” may spill over to
the “real/formal economy” and H2FY17 corporate earnings may also be downgraded.
Thus,
if FY-17 Nifty EPS will be around 405, projected fair value of Nifty may be
around 7290 at historical PE average (mean) of 18 (405*18=7290).
At
current TTM EPS of around 375 (actual) for Nifty, fair value comes to around
6750 and if average Nifty EPS fails to grow around 15-18% in reality, then
eventually market may not assign a higher PE of above 18 also.
Though,
PE is a relative term and Indian market traditionally enjoying a much higher PE
multiple in comparison with its EM peers because of its appeal of 3D
(DEMOCRACY, DEMOGRAPHY, DEMAND) and “Modinomics”, the last D (DEMAND) as well
as the whole “Modinomics” may be now put in serious question as Indian
consumption is traditionally too much dependent on “black/unaccounted money”.
People here also channelize their “unaccounted/graft money” for various
transactions through Bank channels of spouses in order to avoid detection &
IT scrutiny. So, even the consumption sectors like Auto (4W), which does not
deal directly in cash are also being affected for this “war on black money”.
A
market generally reacts to the direction of fund & news flows, both of
which are negative for the Indian market now. FII(s) has sold around Rs.4500 cr
on an average for the last two months in the cash market even before this
demonetization event because of high probability of strong USD/bond yields after
US election. Even if Clinton wins, she has to deliver some kind of fiscal
package (more Govt & Pvt spending) to stimulate the “real economy”
(positive for US inflation & dollar). On an average a 1000 cr FII selling may
be enough for 100 points down fall in Nifty and vice-versa.
Today,
Govt announced some more economic reforms/project approval like “affordable
housing for all by 2022” and various high way projects worth around Rs.6080 cr.
But, the market sentiment is too bearish to react for any incremental reform
announcement by the Govt amid this fear of slowing economic activity because of
demonetization.
Domestic
market sentiment is also being affected by the ongoing political battle and subsequent
“wash out” of the Parliament sessions. Apart from this demonetization issues and
public harassment, there are lots of issues like OROP death, “Surgical Strike”
at LOC, unrest in J&K etc which the opposition parties can raise in the
current session of Parliament just before the series of state elections.
Eventually, the final passage of GST bill and implementation may be in jeopardy
as time is running out and overall sentiment is also not helpful because of
this demonetization public chaos.
Apart
from this demonetization issues which may put some pressure on the overall
approval rating of NAMO, there is significant challenges on proper job creation
for the huge number of Indian youths entering every day in the job market. This
may be one of the vital factor for the forthcoming state elections and 2019
general election. Thus, India may also face some political risks in the days
ahead and a market do not like such types of uncertainty.
Also,
there is too much “celebration” for the proposed GST, which may not be designed
in a perfect way to justify any meaningful additional contribution towards the
country’s GDP and multiple rates with additional cess may add to more confusion
and under compliance. Concept of “one nation one tax” is nowhere in the current
form of GST.
Govt
has also failed for another vital reform area of Land & Labour laws and
despite all the effort & 24/7 PR activity, no rating agency is upgrading
India and its “ease of doing business” index is at very poor condition.
Although,
intention of the Govt to weed out corruption and black money is beyond any doubt,
the methodology and the implementation of the same may be debatable. For a vast
country like India, 85% of currency replacement is not a child’s play and from
the overall scenario, it may take at least 3 months instead of Govt’s initial
commitments of 3 days of pains.
Moreover,
overall public confidence on the Indian currency as a result of such sudden “surgical
strike” may be shattered and more & more people will “hoard” Gold as USD is
not legally tenable here. Eventually, this massive demonetization effort may
back fire on several respects, both economically and politically.
Looking at the chart, it
seems that 8155-8200 area will act as strong resistance for the NF now and in
that scenario, sustaining below 8035 zone, it may fall further towards
7975-7925 & 7675-7425 in the near term. If this trend continues, then we
may see Nifty around 7200-6600 by FY: 17-18 as “death cross” may be imminent.
But in this time of volatility, accumulation of stocks having good professional management with unquestionable integrity, business visibility and de-leveraged balance sheet may work well, if an investor is not carried away by "unnecessary" emotions and act like a Pros, even for the short term.
Market is now a trader's paradise and may be remain so in the days ahead.
SGX-NF
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