Last Friday we highlighted that in our view, Nifty would
likely gyrate in the range of 4700-6700 in next 15months, i.e., a range of
15-18% from the current level.
We suggested that the catalysts for the move on the upside
would largely be domestic and therefore increased domestic participation and
return of EM generally in favor is the key to the bull case for the market.
Case for 4700
The down move in Nifty, in our view would largely be driven by
external factors leading to significant outflow of funds and/or relative
downgrade of Indian equities by global investors.
Historically, large FII flows in a short period of time have
caused huge volatility in Indian equity markets. A reversal of USD carry trade,
if and when US Federal Reserve decides to moderate liquidity conditions in US,
will certainly cause this event.
Though in our view, the liquidity moderation would not be
disruptive to the global economy, in the short term it will certainly lead to
global rise in cost of capital and weakening of currencies with higher CAD,
like INR.
The recent measures to arrest INR fall have exposed our BoP
situation to greater volatility and risk of sudden shocks. Tightening of credit
in developed markets especially US might lead to sudden withdrawal of FCNR
deposits. The swap window for OMCs can also be not kept open for ever; and RBI
would need to recoup the USD put to work while defending INR.
A jerk in the fragile European conditions, both politically and
economically, might trigger the exodus from emerging markets like the case was
in 2011.
A 1996 like political situation post election could lead to
further de-rating of Indian equities by global investors. Not realization of
6-8% earnings CAGR over FY14-16, like FY09-FY11, could also be a dampener.
In strict technical terms, Nifty needs to test levels close to
4500 in last corrective Elliot wave in next 15months.
Strategy
In our view, while Nifty will likely gyrate between 4700-6700,
it may still continue to average close to 5700 in next 15months and settle at
higher levels in 2015-16.
We therefore suggest building investment portfolio in a
staggered fashion over next 6months – during which period we shall likely get impact
of domestic political event (election) and global liquidity event (tapering).
We suggest an optimum mix of domestic and global plays, with
strong focus on balance sheet strength, pricing power, profitability, and beta
to domestic macro-economic fundamentals.
Tomorrow we shall suggest list of our preferred stocks to be
accumulated over next 6months.
Thought for the day
“Realists do not fear the results of their study.”
Fyodor Dostoevsky (Russian, 1821-1881 )
Word of the day
Hoosgow (n)
Jail
(Source: Dictionary.com)
Shri Nārada Uvāca
What will occur first Nifty 4700 or Nifty 6700?
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