Nifty50 is currently at 17350, but your call is this is only a step in the journey in the medium term that will take it to as high as 19600. How far away do you think that target is?
Yes, we are in the early years of a very large multi-year bull market. We have been highlighting that since April last year and based on our framework, we were also maintaining that there is less crash risk till at least November this year and that is based on some of the trust or what we have seen in November last year.
In April-May, we have seen a significant change of hands. One big set of investors were profit booking and it was moving to another large set of investors. In fact, we have come out with a note called Second Wave Resilience and we were expecting that to take off from April till November. Right now, we have sufficient evidence to make some very realistic projections on the Nifty because the latest move has decisively taken out a 10-year channel on Nifty. That is something which we have highlighted in our report.
Once we have such a secular channel, it gives an advantage in projecting and when one projects the size of the channel, it works out to 19,600 in the medium term. That is the one-x size, which is generally the minimum. When you have a 10-year channel like that which is broken, obviously it is now going to end at one x size. If you look at the 2x size, it works out to 24,000 in the long term. Overall, we have a platform for a very large market move and in the latest move, we are seeing a shift towards a frontline.
The frontline leadership has reemerged. The frontliners were neglected, especially the large heavyweights from April to July and now that is reverting. We have seen an exuberance in the smallcaps and microcaps from April to July, especially mid July was that flashpoint where the microcaps showed massive exuberance and there was extreme neglect of the largecaps. The theme is changing since mid July and that is why the impact on Nifty would be much larger this time.
Do you have any concerns regarding the rapidity with which the market has gone up? A month back we were 1,000 points lower on the Nifty50. Does that raise concerns on the price to earnings multiples?
I will not be the right person to explain the fundamental underpinnings behind this. I look at what is happening at the trend level. One thing you can see is that the stocks which are leading this uptrend right now, like Reliance, had built a base for a year before the last two days’ move. So it is not a situation where a lot of these stocks which are now moving have already been vertically up since the last six months.We are not in that situation.
In fact, a lot of them were underperforming and consolidating. This breakout is clearly like leaving a trail of a big base, a one year base, eight months base or at least six months’ base. There are a lot of stocks which are leading right now which actually give sufficient reason to believe that this is sustainable. Even in the broader market, we have seen an internal oversold just seven, eight days back, which is when half the stocks reached an oversold simultaneously.
In fact, the last time we saw that was in January. So in a bull market, such oversold is a very fleeting moment and from where the next six months’ type of uptrend is launched. That makes me believe that we are not overheated here.
The overheated segments of the market have actually seen a risk off from mid July to exactly August end. That is when we have seen an average 20% fall in most of the smallcap stocks. The excess has played out with the bull market correction there.
We are just coming out of a broader market oversold. There are some supportive factors; one thing is at the EM and currency levels, some things are turning favourable right now. That is one of the reasons we got a little inspired to turn a little ambitious on the upside.
The Nifty 50 is at a record high but the Bank Nifty is not. Seeing that it has the most weightage as well on the benchmark index and you have a target of 19,600 for the Nifty50, how do you see the Bank Nifty contribute? Can it take leadership?
There is a high probability of that, at least in the next three-four months. Some of the heavyweights which were underperforming or were neglected, need to contribute for this kind of move that seems to be building in. Bank Nifty had a three-month base building, some sort of slightly rising channel, a three-month channel which was broken a few days back. I am seeing visibility of a short term 12% move on Bank Nifty on the upside.
I fully agree that Bank Nifty could be a contributor here. Only thing I am not clear about is the larger structural dimensions of that. So three to four months’ outperformance of Bank Nifty seems to be opening up here. This sector has over owed stocks which are underperforming. This could be a little tactical, except select banks like ICICI Bank or Axis.
Axis, for example, after almost 18 months is a new high break. These new highs, which are happening after almost 18 months or 12 months, indicate that these stocks are declaring like Axis that they are aligning to this cycle. ICICI Bank or State Bank where the structural merits are there, might have a larger run, but the rest of the banking piece could be more tactical outperformance of three-four months.
You have spoken a bit about the currency factor, about the dollar index falling. It is at the lowest level in a month and that bodes well for the Asian market. The reason behind the dollar fall is that we had weak macroeconomic indicators and the news that taper is just around the corner. If the dollar turns the corner, how do you see that bode for Nifty 50?
I do not look at the fundamental aspects but I look at the behavioural and quantitative data. So one trigger which I am finding now is that most of the shorts, especially the retail shorts, have fully covered. Just before the recent slip in the dollar index, there was a brief breakout attempt. It is 93.75 around DXY. There was a flutter in the system that the dollar is finally taking off.
A lot of those bears have actually given up that point and after that, the dollar slipped. In fact, in January, there was an absolute one sided consensus that the dollar is going to break down and what seems to have happened is that that breakdown confidence has completely evaporated recently. The shorts are covered and the larger structure is a pre-breakdown kind of pattern.
My sense is that maybe with this short covering, following which the dollar slipped, could be the point where the dollar could begin the process of breakdown. Last week, we saw the strength in the rupee and in fact the rupee was actually underperforming the Asian currencies in the last two years and that underperforming structure has broken out.
First of all, we have had an equity outperformance since July. Indian equities were outperforming the emerging market equities in a different way since July along with the turbulence in Chinese equities. That favoured India’s outperformance from June. In fact, it was a three-year break out in India’s leadership within EM, which I think is something significant.
Though it has outperformed a little steeply since the last few weeks, it is not temporary. It is a new structural possibility. India is entering a new trajectory of outperformance within the EM and the currency is also turning around. My view is that flows will turn robust since there could be a structural shift towards the ex-China universe within the EMs and that will benefit India.