Equity Market Outlook

                                                        (Image Courtesy: Financial Express.)

                   The market’s going up! The market’s going down! The market’s going sideways! People shout out their feelings of where the market’s about to go. But where it’s actually headed is not something anyone can predict. At the same time, if you participate in the market, you should have your own idea as to what’s going on- your unique perspective. The market currently reflects the presence of a bunch of optimistic participants. A strong-looking economy gave us hopes of an increase in GDP, but it failed to meet expectations in previous quarters.

           Structural reforms always shake up the system, which is exactly what happened during demonetization and the GST rollout. These baby steps aimed at a better future, saw our reluctance in accepting change. Years of outcry against black money, but demonetization wouldn’t be worth our patience. A tax reform had been due for decades now, but presented with the GST bill, change was too fast.Public reluctance to adopt this paradigm shift reflected in our growth rate and corporate earnings, although demonetization influenced the stock market positively. Real estate, gold and fixed deposits- the common investments for Indians- got replaced by mutual funds and other market vehicles gradually. One year back, Nifty was at 7900 and as of now, it’s at 10300 levels.While sectors like banking, automobile, consumer goods, financial services, media, cement and metals have seen huge rally, others like pharmaceuticals, IT, realty and public sector experienced mediocre gains.Temporary profit booking is evident in these sectors. Foreign exchange reserves have risen record levels of an estimated 400 billion dollars, making the rupee strongest in the past two years. Overall, inflation also seems to be under control.

           Our imports have crossed our exports by a huge margin which is a bad sign. While the former saw a 28% growth, the latter grew only by 8% this year. Corporate earnings have been up to the mark last quarter, especially companies under Nifty that gave good returns. But as a whole not much seems to have changed. Growth in corporate earnings, if not consistent, may lead to corrections. Data from the National Stock Exchange  shows a change in investment pattern from Foreign Institutional Investors(FIIs). The year saw INR 12,200 crore being invested in the secondary market and INR 35,000 crore in the primary market(IPO & QIP). Rise in prices of prominent stocks brought about this shift and it has pumped funds into recent IPOs of insurance companies.

            Last time there was a risk of correction in the market, the central govt. stepped in with a INR 2.1 lakh crore package for public sector banks. The move slightly pulled up stock prices of major public sector banks. The Bharat Mala programme also brought a positive vibe in the market. The PE levels of the Nifty index is 26.4 whereas the PB is 3.4. By valuation principles, these levels are quite high.The current sentiments convey a constantly moving market. Financial institutions presently invest hoping to catch up on profits to be made in the period 2018-20. The structural changes are expected to increase the profit potential of companies and mutual funds, FIIs, etc. believe so. Changes in GST levels are anticipated, but a consistent upward trend should not be blindly bet on. Total or partial profit booking in case of highly priced stocks can protect investors from sudden corrections.

         Sector rotation is a common sight in the Indian market. Sectors growing hugely at a point of time may pressure the markets sometimes. Also sometimes, concentration shifts to sectors with minimum participation previously. An example would be the rise in metal sector last year after about 2 years of gloom. As of now pharmaceuticals, IT, corporate lending, power, etc. seem to be attractive. Consistently growing firms in these sectors can prove to be appropriate for long term investors. Focusing on the management, instead of market indices, to make decisions can result in better moves. As market guru Chandarkanth Sampath said, selecting stocks with good growth and prices discounted by 30-40%, is the best thing to do in the present situation.

        Rise in price of commodities like crude oil, can limit the upward trend in the stock market, at least temporarily. International events have always affected the Indian market time and again. Also, a correction close to year end is commonplace. Even if a correction occurs in the American market, currently traded at pretty high levels, the Indian market might go through a reflection of the same. Unrest in the Middle East, the debt problem in Venezuela, etc. may affect the international economy. Election results in Gujarat is also an upcoming factor capable of indicating the market direction.

Disclaimer & Disclosure:
Sony Joseph,Author is a SEBI Registered Research Analyst and involves in active stock recommendations for his clients.This is a personal view about general market situation:not an advice.Stock market is subject to internal or external risks.Do your own analysis before any decision.