Monday, November 29, 2021
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5 reasons to believe Nifty rally may halt, and 5 reasons why it may not

NEW DELHI: On almost every valuation count, Nifty50 has been trading above its historical averages, making many analysts and traders turn cautious of the ongoing rally on Dalal Street.

But a few others believe strong liquidity globally may last at least the next six months, and thus, they see no end to the stocks rally for now.

First, a few observations for cautious investors.

Nifty50 is trading at a 12-month forward P/E of 21.8 times, which is at 15 per cent premium to its long-term averages.

In price-to-book value terms, at 3.3 times, it is trading at 28 per cent premium to its historical average.

India’s market capitalisation-to-GDP ratio has hit 111 per cent on estimated FY22 GDP numbers, above its long-term average of 79 per cent. The Buffett Indicator, named after legendary investor Warren Buffett, says equities become expensive when m-cap of a country’s listed stocks exceeds its GDP level.

MSCI India Index is trading at an 80 per cent premium to MSCI EM in P/E terms, above its historical average of 57 per cent.

Lastly, as Motilal Oswal Securities noted, India’s share in the world market-cap is now at 2.8 per cent, which is also above its historical average of 2.4 per cent.

Valuations do suggest the market valuations are rich.

There’s no stopping D-Street rally!

But the momentum so far is with the market, and how!

Elara Securities said some macro tailwinds from emerging market equities and currency trends appearing on the charts are signalling a favourable backdrop for robust Nifty50 targets over the next 4-6 months or 6-8 months.

“We are only seven days away from an internal oversold market. The current rally is preceded by a running correction and/or consolidation of nearly six months. As a rule of thumb, it could mean a shelf life of at least six months for this uptrend. The ship is just beginning to sail for a new and different kind of voyage hereafter,” it said.

Elara said that turbulence in China has been accompanied by resilience in emerging market ex-China trends.

“This trend is poised currently at a good launchpad for a durable takeoff. While India has 11.6 per cent weight in the MSCI EM Index, the weight goes up to 17.4 per cent for the ex-China version. This can be a catalyst for India flows,” Elara said.

A halt to the dollar rally can help. The recent push to 93.73 for the Dollar Index is mostly the top of the US dollar recovery, Elara said.

Retail shorts panicked at this move, forcing them to cover all their positions. During the early part of the year, the entire planet was short on the dollar. That bearish consensus has now fully reversed. This could well be the point where the US dollar downtrend could start,” Elara said.

The Dollar Index usually has an inverse relationship with emerging market equities.

Elara said the new trajectory of outperformance of Indian equities over EM equities is now joined by a new trend of outperformance in the rupee.

“The past two years’ underperformance of the rupee against other Asian currencies is currently reversed, signalling increased probability of a new uptrend with prospects of a 5-6 per cent appreciation,” it said.

Other brokerages said earnings have been strong and that macro trends going into the festive season are all pointing towards a strong recovery for India going ahead, which suggest the bullish market trend may continue going ahead.

“Eventually, equity market movement is a function of how well the economy does. Earnings growth is the biggest driver of stock prices. Overall the last 7-8 months, we have seen broadbased earnings growth. Commodity companies are making a lot of money; the real estate sector is reviving and the banking sector’s asset quality is in much better shape than what was expected earlier. The market is expecting that we are at the start of a multi-year earnings growth similar to the 2004-2008 earnings cycle,” said Aditya Khemani, Fund Manager at Motilal Oswal AMC.

Kotak Securities said net profit for Nifty50 firms is likely to grow 31 per cent in FY22 and by 14 per cent in FY23. Elara has a medium-term target of 19,600 and long-term targets of 24,400 for the Nifty50.

“We have repeatedly said the early few years of a new bull market will have a plethora of ‘false negatives’, which fails to yield the intended bearish outcome. The fact is when the real bear market begins after many years, nobody will have a clue; either one will be too early or too late,” Elara said.

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