Nifty Closed Almost Flat As Market Did Not Trust The Exit Polls Considering Its Recent Records

Market Wrap: 10/03/2017 (22:00)

Indian market stayed cautious ahead of actual result & US NFP data as probability of a Fed hike next week is now almost real.

Nifty closed the week almost 0.6% higher amid high probability of a convincing BJP/NAMO win almost all the five states, including UP, but except Punjab.

What’s for next week after tomorrow’s actual verdict in the state polls, which is being seen as a mini referendum for NAMO after the sudden decision of DeMo?

Time & Price action suggests that, Nifty Fut (March @8954) has to sustain over 9020-9035 area for further rally towards 9075-9125 & 9195-9275 and further to 9350-9550 in the short term (under bullish case scenario).

On the other side, sustaining below 8995 zone, NF may fall towards 8945-8900 & 8865-8795 and further to 8695-8585 area in the near term (under bear case scenario).

Similarly, BNF (LTP: 20796) has to sustain over 20950 area for further rally towards 21050-21150 & 21350-21500 and further to 21800-22150 area in the near term (under bullish case scenario).

On the other side, sustaining below 20900 area, BNF may fall towards 20750-20600 & 20490-20250 and further to 20050-19900 zone in the near term (under bear case scenario).

Nifty Fut (March) today closed around 8954, almost flat (-0.01%) after a moderate day of volatility in which it made an opening minutes high of 9003 and a session low of 8916. Indian market today opened slightly higher following positive global cues and yesterday’s favourable exit polls; but did not sustain the high of the day and quickly has gone into selling mode as market turned cautious ahead of the actual result, ignoring the exit polls, considering its past poor performance on many occasions.

Typically, such exit polls may be accurate, when there is a strong political wind in favour of any party or political leader, like for NAMO in 2014 general election. But, in case of fractured or any decisive visible political wind, most of such exit polls may go wrong as in Delhi/Bihar election or even in the case of Brexit or recent Trumpism in US. In the back drop of DeMo and its adverse effect on the unorganized sector or rural economy, market may not be 100% confident with the exit polls, specially for UP, where such polls of polls (average/consensus of exit polls) is indicating around 195 seats for BJP this time.

The verdict from these state elections, especially from UP is being seen as a mini referendum for NAMO after the controversial & surprised decision of DeMo in Oct’16 and may also clear that if the sudden DeMo movement by Modi is indeed a political master stroke or a suicide. By his stance of DeMo & “war on black money & corruption”, NAMO is being seen as “friend” of poor section of the Indian society and together with that, have a formidable support base within salaried Indian middle class, which has made NAMO an undisputed political leader of the country as of now.

A formidable win for NAMO tomorrow may pave the way for more reforms including implementation of GST and passage of Land & Labour bill. It may also ensure success of NAMO in 2019 general election as there is no compatible national leader of his suture as of now and politically, India will be much more stable and will be seen as market & INR positive. On the other side, an unexpected defeat or even a fractured verdict may cause immense short term volatility in the Indian market as it may weaken NAMO’s position in the BJP party and may also increase India’s political risk significantly.

Indian market also stayed cautious ahead of US NFP job data, which is later flashed as very good on the headline level, but below expected on the crucial wage growth aspect:

NFP (Feb): 235k (estimate of 200k); prior: 235k (revised)

Unemployment rate: 4.7% (estimate: 4.7%; prior: 4.8%)

Participation rate: 63% (prior: 62.9%)

Average weekly hourly earnings (MOM): 0.2% (estimate: 0.3%; prior: 0.2% revised from earlier 0.1%)

The NFP report is no doubt block buster, considering the US economy is being able to generate an average NFP figure of around 227k/pm for the last few months and unemployment rate also fall a bit despite higher participation rate, which may be also a good sign; but the tepid wage growth may also compel Fed to be on the side line with a hawkish hold stance next week for this slight disappointment in the wage growth. Yellen may take the below expected wage growth as an excuse as eventually, a weak wage growth may be against the consumption & reflation story of US economy and may not hike eventually on 15^th March.

A hawkish hold stance in March may be also helpful for Yellen, as Trump is now himself against a stronger USD contrary to his earlier rhetoric. Thus, considering today’s tepid wage growth, it may be easy for Yellen to manage also her political boss and at the same time manage the high expectation of the market/FFR, which was still around 100% yesterday; now around 90% after NFP data.

In any way, if Fed will not hike next week despite 24/7 hawkish scripts, it may also raise vital questions about Fed’s own credibility and market may not believe in Fed anymore so easily and USD will be sold off heavily. The three dot plots of Fed may be also in question considering the actual trajectory of “Trumponomics” and Trump’s effort to talk down the USD, terming it as overvalued against other currencies constraint for the health of US economy & exports. In that scenario, US politics/Trump may be more important for Fed than economics and eventually, it may hike only once in 2017 rather than 2-3 times as projected; consequently USD/US bond yields may also plummet.

A weak USD as a result of no Fed hike in March or even one rate hike in Dec’17 may also be beneficial for EM currency including INR and Indian market.

After market hours today, Indian IIP data came as +2.7% for Jan against estimate of +0.5% (YOY: -1.6%; MOM: 0.1%), which may also be positive for the market after better than expected Q3FY17 GDP of 7% despite DeMo blues; although both the figure may be heavily skewed for the favourable base effect.   

Overall, if BJP is able to gain more than 200 seats in UP tomorrow along with convincing win in other states as par the exit polls, market may certainly open gap up on Tuesday and will celebrate the “Holi” in style; but after the initial euphoria or hype is over, market may also concentrate on other realities, like a Fed hike next week (?).

Also, passage & eventual implementation of GST in July-Sep’17 (??) may be turned out into another disruption like DeMo because of so much regulations & some faults in basic design with multiple rates of taxes, which is against the basic concept of GST (one nation, one tax) and may not contribute meaningfully to the overall economy  (GDP & earnings of corporates/small business). Small business may also face significant headwinds, if GST will be implemented in a hurry as they are not prepared at all and may also face multiple headwinds because of cost of compliances and adaptation and it will be very much interesting to see, if Govt/BJP/RSS is itself ready to take another political risk before 2019 election after the DeMo fiasco.           

Also, resolution issues of huge bank NPA/NPL, tepid business credit growth & private investments, lower capacity utilization as a result of inadequate demand, lack of effective implementation of reforms, stressed corporate sector, hawkish RBI and above all, Govt’s stance on the continuation of “war on black money” for its logical conclusion may be some of the headwinds, which may began to haunt the domestic market in addition of various global jitters.

As on date, Q3FY17 Nifty average EPS may be around 385, which was 375 in Q2FY17 and 370 in Q3FY16; i.e. an average growth of 4% YOY and 2.5% QOQ (annualized CAGR may be around 10%), which translates an average growth of around 7% for the last two years.

At 385 EPS, present Nifty PE may be around 23.20 (at Nifty 8935) and at 9000-9200 Nifty, PE will be 23.37-23.90, which may be at higher zone, considering its historical mean average of 18-20 assuming an average CAGR of even 10% EPS growth and India’s 3-D premium.

Even projected FY-17 EPS at around 405, the FY-17 PE of 22.71 at 9200 Nifty may be expensive. At projected FY-17 EPS of 405 or even 415 and an average PE multiple of 20, fair value of Nifty may be around 8100-8300.

Technically, whatever be the narratives, NF has to sustain over 9035-9075 zone for the life time high of 9125-9195 area; otherwise it will fall again as another example of “buy the rumour and sell the news” , even if BJP wins convincingly in UP and other states.