Vijay Kumar Gaba: Market at crossroads

After topping ~18600 in October 2021, the benchmark Nifty is now back to ~17000, the level where it was 12 weeks ago. In general statistical sense, it could be said that market has not yielded any return since August 2021. However, during this 3200 odd point up and down journey of Nifty, the actual outcome might be very different for various investors, depending upon their portfolio positioning and activity during this period. The portfolio of a monthly SIP investor may not have changed much in this period; whereas someone who got greedy at the peak and invested larger amount in mid and small companies may have lost 10-25% of his latest installment of investments.

Of course, 12 weeks is an extremely short, and mostly irrelevant, period to account for the return on investment in equities. However, it could be a useful timeframe to assess if the market is changing its course.

Having quickly recovered all the losses from panic reaction to the pandemic, and moving about ~50% higher than the pre pandemic Nifty highs of ~12500, the Indian equity markets now appear tired and indecisive.

The indecision and tentativeness may be emanating from a myriad of factors. For example—

· Indian markets have outperformed most of the global peers in past 20months. The global investors are now looking at the underperforming markets in search of better returns. Many global brokerages like Credit Suisse, Morgan Stanley, CLS, Goldman Sachs etc., have downgraded the weight of Indian equities in their portfolios to allocate more to China etc. The global flows to India may therefore slow down further.

· Indian economy and corporate earnings have so far failed to match the exuberance of Equity prices, making the valuations of Indian equities relatively expensive, at least on the conventional parameters like price to earnings, EV to EBIDTA, price to book value, etc.

· The inflation continues to be a significant concern in India. Despite repeated reassurances by RBI to remain growth supportive, the market participants continue to expect monetary tightening. The interest rate and liquidity sensitive sectors like financials, real estate and auto may be struggling due to this anticipation.

· Many regions have recently witnessed fresh surge in Covid-19 cases. Market participants are watching this development closely. A significant worsening leading to fresh mobility restraints and logistic holdups could impact the markets adversely.

· In past few months the activity in unlisted securities which are expected to be listed for public trading in next 3-12 months has increased materially. The money invested in these securities is typically locked up till 6-12month after the security is listed. Some active money has thus ventured out of the market.

· The global money market is widely expected to become tighter in 2022, with many central bankers tapering the pandemic stimulus. The market participants may be unsure of the likely impact of this. A stronger USD due to fed tightening may led to outflows from emerging markets like India. However, a growth shock in developed markets could lead to surge of flows towards emerging markets.

· The logistic constrains that prevailed in past 20 months are easing fast. The non-agri commodity prices have started to correct accordingly. The availability of semi-conductor chips, that hampered the manufacturing across the globe in past six months, has also started to ease now. The shipping rates are also in the process of normalizing. All this could have implications for the equity markets.

The sectors like metal users, merchandise exporters, auto makers that have suffered due to high commodity prices and logistic constraints, could see their operations and cost structures normalizing, whereas the firms which have made exceptional gains, like metal producers, may also see their profit margins normalizing.

Once the market participants are able to assess the impact of these factors on future earnings and market performance, we shall see the new leadership emerging in the markets.

For making a directional up move, the market needs a near consensus on the new leadership; which has been lacking so far.

The directional down moves usually occur on failure of a basic premise which has been near consensus (bubble burst); some unexpected event causing panic amongst investors (sighting of black swan); a prolonged economic recession; and/or major change in policies making significant negative impact on large number of existing businesses (transformational reforms). Nothing of this seems to be occurring at present.

It is therefore more likely that market may spend some more time at the cross roads, searching for a direction. Recent jump in implied volatility is just one confirmation for this premise.

Markets indecisive