MARKET OUTLOOK POST CORRECTION
The markets have gone through a significant churn over the last few months driven by various factors which started from the general overvaluation in Mid and Small Caps to rising concerns on rising crude oil prices & inflation, Fed rate hike fears, Trade Wars, INR fall and then the eventual crash in the US Markets which led to the final meltdown. However the future is brighter and panic is the best time for long term investing.
I have pointed out several times that the risk in the markets is not the same as perceived risk. When markets are falling, INR is under pressure and there is a possibility of interest rate hikes we normally see panic being spread all around. These times are typically the best times to invest. The following data reflects this so well
Nifty performance in the years following major #INR declines
2008- INR fell 20%, 2009- Markets rose 75%
2011- INR fell 19%, 2012- Markets rose 28%
2013- INR fell 12%, 2014 Markets rose 31%
2018 INR is down 15%, 2019 Markets ?, Markets will do very well next year.
The other big fear that is playing out is related to the “Fear of Elections”. However in my view this should not be a fear as markets do not like uncertainty and once uncertainty goes away markets do well as is reflected in the following data.
| YEAR | RETURNS
JUNE TO DECEMBER |
| 2004 | 40.1% |
| 2009 | 16.0% |
| 2014 | 14.6% |
| 2019 | ? |
This data reflects that the markets will rally sharply after the next general elections. There are several fundamental factors for this.
- Broader markets have become very cheap and stock specific opportunities will be huge
- Building Material stocks have become cheap and provide good growth opportunities
- Sugar is starting a new upcycle
- Ethanol presents a strong opportunity
- Capital expenditure cycle revival will present opportunities in capital good stocks especially mid cap
- Infrastructure stocks are very cheap and will do well as inflation subsides
- Cement sector could be starting a strong upcycle
- Automobile stocks have become cheap relative to long term potential
- Consumer Goods stocks will become interesting on some correction
- Post May 2019 will be more of a Buy and Hold market as specific sectors and industries will have a secular run
- Fears around INR depreciation are unfounded as for a CAD economy a strong currency makes no sense. Chinese currency has depreciated as much
- Oil price rally was sharper in the last bull market, renewables were not a big factor then. This could be the last Oil bull cycle
- There is broadbased economic recovery now so even if Fiscal Deficit goes up this year it will be in control over the long run and as such not a big factor
- Twin deficit fears are largely unfounded
- Market downside in corrective moves should largely be restricted to not more than 10-12% from the top.
- Such corrections should be used to Buy the Markets
- Current year NIFTY Earnings should be around Rs 575. Valuations are no where near bubble territory
- Market tops are mostly made at market PE’s of around 30+, huge outperformance from Small Caps and Euphoria with no fear
- None of these things exist as of now.
So what do I say in conclusion
Without making it very long in terms of a view I believe that the markets are in a mid cycle correction and this is not the end of the bull markets. As such we will see much higher levels going forward. The key is to buy the right kind of stocks and hold on to them to ride out the cycle. The interest rate cycle will not be very steep the way things are placed and big fears on very high rates due to an inflationary spiral are unlikely to play out.
It is believed that trading does well in high volatility. It is actually not true. Excessive volatility creates wild swings on both sides which is not good for trading as most traders get stopped out, except for those who have very large capital and are able to take the volatility in the stride.
The significant improvement in the Ease of Doing Business ranking of India, the digital economy and GST are improving efficiencies and creating possibilities of a higher growth with lower inflation. Lot of good work has been done by the Government on the bank clean up, transparency in bidding for projects, reducing the cost of doing business etc. This will hold stead irrespective of who wins in the next elections. Any improvement in the trade tensions between the US and China will be an added positive.
Overall India is well placed in the global context and the next 2-3 years will show that. Markets will be higher, much higher the same time next year.