I had written about my prognosis for the economy and the stock markets on the 20th of April via my note “The Juggernaut is rolling”. The thesis for the same remains and over the last few days we have seen the stock markets sell off quite a lot. The Nifty and Sensex have now reached levels that were seen in September 2014. As such we have not only had a selloff of 10% from the top but have also had a time wise correction of around 8-9 months. This was my thesis to start with. The markets had run way ahead of fundamentals and it is difficult to predict markets over short periods of time where momentum has a greater impact, however over the medium to long term markets are and will always be slaves of earnings.

The results season till date has been mixed. A lot of companies are still to report, however a large number of Technology stocks have reported and the earnings and outlook is not exciting with the companies facing challenges related to currency moves as well as pricing pressures. Their businesses are in the midst of a churn which should eventually settle down. Besides this telecom stocks have reported and here the outlook is decent. Results of a majority of high flying mid caps have been muted or just about met lofty expectations. There also are indications of significant inventory build-up in some companies that recently reported, like Kajaria Ceramics and Exide Industries. On the auto side Maruti reported very good numbers and as I write this article their April numbers have also come out which are very strong. Banking sector results have been surprisingly resilient and reflected in the near term outperformance of the Bank Nifty. Cement company results have been disappointing. Most capital goods, pharmaceuticals and consumer companies are still to report.

Overall, as expected the results are nothing to write home about.
The markets have also come under pressure due to the continuous offer for sale by either promoters or by strategic holders and we saw sales from Infosys, HCL Tech and a huge sale in Sun Pharma by the erstwhile owner of Ranbaxy. Besides this there have been other big sales too. All of this has had a technical impact on the markets where lot of the funds have got absorbed in these sales. Indian markets became the darling of global investors post the formation of the new government at the centre and India became a huge overweight in most global portfolios. We are now seeing a correction of the same with increased allocations to China, Russia, and Brazil etc. Growth has not picked up as expected by most trend following investors (it was never going to) and on top of that we again have chaos created by the Finance Ministry and IT Department on MAT taxation, retrospective demands etc which has had an impact on sentiments. A lot of noise is also being made out of possibly bad monsoons. Unseasonal rains have impacted rural demand in the short run, however these rains could help retain soil moisture and come to the aid of farmers in case of deficient monsoons.
However all of these things are what would eventually create the much required correction in the markets. Stock market participants and experts always find a reason for the correction after the correction has happened. The important thing is to see it with a perspective of the future.

Consumer inflation is unlikely to pick up- Monsoons or not I do not see consumer inflation pick up in any big way. Historically food inflation is driven by MSP increases and not by rains, unless and until they are really bad. Global food stocks are at historically high levels and at 25% of global production as against a normal level of 15%, Edible oil prices are subdued and Global Dairy product prices have crashed nearly 60% over the last one year. Real Estate and housing inflation is totally absent and with low input prices and slow demand there are unlikely to be any major price increases by companies across the board and we could actually see discounts. Crude prices are still half of what they were a year back despite the recent rally. Major spikes here are also unlikely. Overall CPI will remain muted and RBI will cut rates further which will drive economic growth.

Growth revival is now around the corner and it’s a matter of a few months. There are positive triggers for the markets like the passage of the GST bill which should be taken very positively by the markets. The Land Bill is difficult to call and we need to see which way it goes. Some sort of global correction seems to be building up across the developed world markets like the US, Europe and Japan. It is possible that the heavily overbought Chinese markets could also sell off sharply in a short period of time. This will impact global fund flows and Indian markets in the very short term.

However I believe that these things will play out over the next two weeks. Indian markets do not have much downside from here and my base case view is that the markets should bottom out around the 7900 levels. This level will be a good entry level irrespective of the case even if we see a further selloff in the markets. Any correction below this level will be very temporary and a one or two days phenomenon.

Panic is around the corner and it will be the time to BUY and play the Indian markets as the “JUGGERNAUT FINALLY STARTS ROLLING”

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