After this decisive breakout, technical analysts believe that Nifty will reach higher levels in coming weeks. “Since the uptrend is continuing, Nifty may reach 16,530, the upper line of Pitchfork technical indicator, in the next 4-6 weeks. The previous top of 15,930 is the new base and this structure is intact so long as the 15,930 level is not violated,” says Sacchidanand Uttekar, Deputy VP, Trade Bulls Securities.
Short and medium term market direction also changed with this decisive breakout. “Nifty’s direction is positive in short term (target is 16,400-450) and in medium term (target is 16,800). This impulse wave may terminate around 16,800 as per Eliot Wave structure, and after that, Nifty may get into a correction of 800-1000 points,” says Gaurav Ratnaparkhi, Senior Technical Analyst, Sharekhan.
Analysts have also started taking strong positive views on the market, mostly because of the easy monetary policy followed by central bankers. “With accommodative financial conditions worldwide, we see the mega rally in risk assets to continue. We reiterate our Nifty target of 18,000 by December 2021,” Says Amar Ambani, Senior President & Research Head, Yes Securities. Once covid situation stabilises, global governments will embark on growth drive and India is also expected to participate in it with continued spending on infrastructure and fast tracking of economic reforms.
(Narendra Nathan/ET Bureau)
Macro update: Growth holds key to further market upside
Investors accepting lower equity risk premium: Key factors indicating high risk appetite of investors (or low equity risk premium) for Indian equities currently are: (a) low earnings yield of Nifty50 (trailing at 3.3% and forward at 4.7%) as compared to bond yield of 6.2% and declining earnings yield spread of mid, small and micro-caps over large-caps; (b) fear index at one-year low (Nifty VIX at 13); (c) High Nifty 50 index returns in the recent past (+108% since Mar’20 lows) and even higher returns from mid and small caps and (d) relatively low CDS (credit default swap) spread of India over US. Safe haven assets such as gold and dollar have also trended lower since 2020 but have resisted further downtrend in recent months.
Higher impact of delta variant of covid on EM growth compared to DMs has dented some risk appetite of FPIs towards EMs. However, the impact has not been significant for India in terms of outflows so far at US$863 million since April 2021.
Uncertainty over recovery reduces: Corollary of lower equity risk premium is that investors are willing to accept lower returns as uncertainty of economic recovery reduces. Historically, one-year rolling period returns from Nifty50 have seen huge gyrations (+95% in 2010 and 2021 and -55% in 2009) and currently we have exited one of the highest one-year rolling returns period in history which diminishes the prospects of a sharp upside from equities in the near term unless growth surprises meaningfully. To be sure, the long term expected return of the Nifty50 based on rolling 10 year periods since 1990 is around 12%. Currently, on a 5 and 10-year rolling basis, Indian equities are just around the long term expected returns of 12-13% and do not indicate euphoria as earnings growth trajectory continues to be in-line with strong growth expectations especially from cyclicals.
Incrementally, interest rates and liquidity will no longer drive risk appetite: As global growth revives in 2021 (6% y-o-y as per the IMF), largely balanced by upgrades for DMs and downgrades for EMs, options open up for major central banks (US FED, ECB etc.) to start normalising the unprecedented easing post covid and record low interest rates. However, consensus is building on gradual normalising of monetary policy and as long as that remains, markets will not see any knee-jerk reaction like the one seen during the ‘taper tantrum’ of 2013.
Growth prospects appear robust and will hold the key for further upsides: Expensive equity markets assigning lower equity risk premium do not in any way imply corporate earnings growth outlook will falter, which typically is the key driver of stock price corrections amongst other factors. However, it does imply that margin of safety is much lower in case growth falters; hence, we believe that the continuation of earnings growth meeting or beating estimates is crucial for the market to sustain current levels of valuations. As per the IMF, while 2021-22 GDP growth for India has been downgraded to 9.5%, the 2022-23 growth has been upgraded to 8.5% thereby largely maintaining India’s medium-term growth prospects over 2021-23 at 9% from earlier 9.2%.
(ICICI Securities)
