Market Might Fall 5-7%
The Indian equity market saw a V-shaped recovery in the last six months. From 52-week lows, the Nifty50, Nifty Midcap100 and Nifty Small cap100 rose 57%, 63% and 90%.
The valuations have reached above pre-COVID level. Though, the economic and earnings growths are negative and are expected to stay so for the next few months.
The volatility building up in the last one month pointed at the necessity of correction. The fall should neither surprise us nor should it be considered as a change in trend.
The volatility is of course expected to stay for the next two-three months. However, we should also note that if any fiscal or monetary stimulus is provided, there could be a reversal. Stabilization in coronavirus cases will make the momentum stronger. The new wave of infections is impacting the world economy.
The economy is currently functioning in a ‘new normal’ and is expected to overcome the challenges by improving on a month-on-month basis. Though the economic rebound will be slowed down in the short-term by the new restrictions.
This situation might exist until a vaccine comes out, which could take almost another year. Meanwhile, herd immunity and fall in virus mortality can help overcome the crisis. The economy will continue to move on and try to overcome the slowdown.
The initial fiscal and monetary measures helped provide financial support to households and the private sector to handle economic uncertainties. If not for the qualitative support, the collateral losses would have led to a world financial system collapse.
The growth of the economy is expected to remain slow but shall be steadier than the worst quarter of April to June 2020. To sustain financial confidence and economic persistence, the economy needs one more qualitative measure. This will also help in stopping financial losses.
Post the Presidential Election in the US, the second wave of support is expected in the US. ECB is planning something similar in the Euro region.
Nifty50 corrected 3.8% this week. From the recent high to low, it has corrected by 8.5%. Since the last two weeks, global volatility, currency and dullness in Indian heavyweights were pointing towards a correction.
Bounce in global markets, domestic and FII inflows supported the fast recovery from the March low. The market was taken ahead of the fundamentals by the price gains and it was always going to be difficult to sustain the rally in case the economy doesn’t improve.
The market reached near-record high but corporate profitability reached a new low for FY20 that is expected to go worse in FY21. The estimated amount of primary deals is approximately Rs 1,20,000 crore in the last four months. Huge discount in prices made the primary market more lucrative than the secondary market. Given the arbitrage opportunity, the money might be shifting from secondary to the primary segment.
High prices, the slowdown in economic recovery and increase in COVID cases cautioned the global markets which, in turn, reduced the FII flows.
From the recent high, the Nifty50 has corrected about 1,000 points and is trading at important technical support levels. This is especially for large caps while mid & small caps are still weaker.
The sectors like pharma, FMCG, IT is defensive and might withstand the negative trend and come back stronger than other sectors.
The best strategy for the next two or three months is accumulation. The momentum of the Indian market might be volatile in the short term based on the muted global trend.