Vijay Kumar Gaba

In the past one month the benchmark Nifty50 index has gained over 7%. With these gains Nifty returns are now positive YTD2022 as well on a one year basis. In fact, the August 2022 Nifty Future expiry was the highest since October 2021 Future expiry of 17857. Even for Bank Nifty, the August 2022 Future Expiry was highest ever; since October Future expiry of 39508. Indian equities are now outperforming most major global markets on a one year basis.

On one year bsis Nifty is now higher by ~6%.In this period, IT (-15%), Pharma (-8%) and Small Cap (-4%) are notable underperformers; while Energy (+39%), Media (+33%), Auto (+33%), PSU Banks (+30%), Realty (+21%) and Midcap (+14%) are notable outperformers.

The ~7% gain in the past one month has been led by Metals (+13.5%), Private Banks (+9.9%) and Energy (+9.8%). Pharma (+2.3%) and FMCG (3.3%) have been notable underperformers.

This strong market performance has occurred in spite of  – (i) below par 1QFY23 corporate performance; (ii) continued monetary tightening; (iii) elevated inflation; (iv) worsening current account and weakening currency; (v) weakening global growth impairing export growth outlook; (vi) erratic monsoon impacting kharif sowing and clouding rural demand outlook; and (vii) worsening geopolitical situation in China Sea as well as Ukraine. Obviously, there are doubts over the sustainability of the current market up move. The question thus arises “how does market look in the near term (next 6 months)?”

In my view-

(a)   The economic situation in Europe, US, and China may continue to worsen materially into summer as the energy crisis worsens; drought intensifies further; food inflation rises further; monetary tightening continues and global demand slithers further down.

(b)   Macro challenges in India may continue to remain intense in India as food inflation stays elevated in festival season; RBI tightens further in busy season; exports slowdown keeps CAD elevated; manufacturing growth continue to disappoint on poor export order flow; overall growth remains below the budget assumptions impacting the revenue collection estimates & public expenditure; election to some key states keeps reform agenda in check.

(c)    Relative stability and growth may keep the foreign flows positive. However, some of this could be neutralized by poor domestic institutional flows, as we have seen in the month of August.

(d)   The earnings downgrades may accelerate post 2QFY23, as even the current consensus on earnings growth (~15%/16.5% for FY23e/FY24e) looks slightly optimistic.

(d)   Technically, most Indian indices are in a neutral zone as of now – implying even risk reward in near term. The benchmark indices may rise or fall by 5-7% in the next 2-3months. However, in case Nifty does rise by 5% from the current level, the risk reward shall become very negative. For BankNifty though it may still remain neutral.

So in my view, Nifty may move in the 16250 – 18750 range, with occasional violation on either side, in the next 6 months. Most of the Nifty upside could be contributed by financials. BankNifty could therefore outperform materially. In technical terms the range for BankNifty could be 36800-44000, with occasional violation on either side.