Reform boost and earnings recovery to support markets
The Indian equity markets soared during the month of April and touched record highs. While the Nifty ended the month of at 9,304.05, the Sensex closed at 29,918.4; up 1.01% and 1.42% respectively. Midcaps and smallcaps outperformed their larger peers with the Nifty Freefloat Midcap 100 and the Nifty Freefloat Smallcap 100 indices up by 5.17% and 6.57% respectively during the same period. The run up was on the back of positive news related to French elections, tax policies in US and BJP's landslide victory in New Delhi municipal elections. In addition to this, the positive momentum was supported by a spate of earnings announcements either meeting/beating estimates for most sectors barring IT.
In terms of valuations, the Sensex and Nifty are trading at a forward PE multiple of 17.9 x and 17.8 x respectively, which is a tad bit stretched as compared to historical valuations. In our opinion, rather looking at the headline indices which do seem to be trending upwards and which do seem to be a little stretched if you are looking at on the valuation side, it would be more prudent to look at stocks instead. And even at current market levels, there are plenty of stocks that offer value in terms of valuations. As such, the markets are on an upward trajectory supported by an improvement in the country's fundamentals. This is clearly reflecting in the earnings growth too that has improved from the levels seen 3- 4 quarters back. Although recovery is yet to be broad based, nevertheless earnings are on the path of improvement too. Fundamentals are expected to improve on the back of improving macroeconomic factors with recovery led by consumption, followed by public sector capex and external demand improvement;, benefits of reforms percolating to the ground level and conducive inflation/interest rate environment. While we do think that markets would continue to trend upwards over the long term, however there could be some aberrations due to global events. But as seen earlier too, our markets are quick to recover during such times as the domestic growth story remains intact.
In terms of sectors, we remain positive on autos and auto ancillaries given that they enjoy a multiplier effect to economic growth. We also like stocks from the infrastructure and capital goods spaces given the Government's focus in that space; consumer durables is also an interesting space, particularly those companies that stand to benefit from the early onset of summers in most parts of the country. We are thus optimistic on infrastructure, sectors linked to affordable housing, and consumption led sectors; we thus recommend investments in quality names in these spaces.
On a technical basis, the Nifty Index has entered into a sideways trading range indicating consolidation phase following the recent up move. Further, it is oscillating in a Broadening Wedge pattern on a larger time scale. Breakout from the trading range resistance i.e. 9,375 can extend the up move taking it to the upper end of the broadening wedge pattern i.e. 9,450. Moreover, a close beyond the upper end of the wedge i.e. 9,450 can take it to levels of 9,575. However, a trade below the lower end of the range i.e. 9,290 will trigger a breakdown dragging it lower to levels of 9,230-9,145 being Broadening Wedge pattern support line.
Nifty Bank Index is approaching upper end of a rising Wedge pattern which is placed at 22,975 with intermediate resistance at 22,840. Failure to breakout of rising Wedge patterns generally leads to correction. Therefore, failure to cross 22,975 levels may lead to profit booking dragging the Index lower to levels of 22,280-22,000. Further, a trade below 22,600 would also trigger a breakdown from trend line support pulling down the Index. However, a trade above 22,975-23,000 levels can resume the uptrend taking it to levels of 23,340-23,680. RSI is forming a negative divergence affirming that the uptrend is losing momentum. Given that the long term trend for the markets is positive which will be driven by an expected turnaround in earnings, which in turn would be a function of the economic recovery, we suggest that any corrections should be used as an excellent opportunity to pick up quality stocks.
Published on: 22nd May 2017
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