The markets are certainly poised at a very interesting point, both globally and in India. To begin with, I must admit that my prediction about the rate hike by US Fed turned out to be wrong. I am very surprised at this as I think it would have been in the interest of the US to increase the rates and normally US administration is not too concerned about the impact of their own actions on the rest of the world. Be that as it may, the cards have been dealt with now and we can therefore look at how the game would be played out from here on.
Let us first look at the global factors before we come to our markets. Of late a lot is going on worldwide that will have deep impact on businesses in these areas and consequently the markets there. Consider for example:-
- The Chinese economy continues to show signs of slower growth and the unraveling of Alibaba is further cause for concern. Pressure on the Chinese economy will put stress on US in a significant manner.
- Europe continues to struggle with the refugee crisis and also the prospect of cheaper Chinese goods potentially flooding their markets in the near future. This will be a body blow to European businesses.
- Japan and the US are actually doing well compared to most other countries but it will take a while before they can assume leadership position as far as growth rates are concerned.
- Brazil, Russia and South Africa have been given a welcome respite by the US Fed stalling the rate hikes but they continue to be trouble spots and will remain under serious stress for some time to come.
- If one has to make an overall assessment the non-hiking of US Fed rates has only prevented a global market plunge, but it has not resulted in anything significantly positive.
What about our markets? As the RBI Governor said today, we are actually in a relatively calm place amidst the global turmoil. However, if we side step the rhetoric and concentrate on the real issues, here is what we would see:-
- All the boost that the market could have received through sentiments of the regime change in 2014, have now completely run their course. The legislative performance of the government has been mediocre and the going back on the land acquisition bill amendments has to be necessarily seen as a defeat.
- Inability to get GST passed will have a direct effect on the possible growth rate increase in the next FY and beyond.
- Inflation has definitely been lowered, thanks to the falling crude oil prices, but the matching rate cuts have not really taken place. We continue to remain a country where it is tough to get funding for most businesses.
- Politically the elections in Bihar have assumed a huge significance for the government. If the NDA loses, as well they might now, it will signal the comeback of a more aggressive opposition tactics in parliament and this will make the passing of legislation even more difficult.
- The IIP numbers have not been encouraging and the overall demand environment seems to be muted.
- The lack of a good monsoon will result in dampening of demand, especially the rural variety and this will have a direct impact on the businesses of many companies.
- Taking all the above into account one can safely predict that we are going to see another lackluster quarter as far as corporate earning goes. The impact on the stock markets can hardly be positive.
So what does this really mean in terms of market levels? Let me make some calls on the Nifty as that is the index which I track. I think this is how it will play out in the next few months:-
- Right now, there may well be a relief rally over the next week or two after the impending doom of the possible US Fed rate hike has been averted. I see the Nifty trading between 8000 and 8300 or so, with a positive bias.
- RBI will cut rates by at least 25 bps and this can push the Nifty to 8500 or thereabout in the first week of October.
- I do not expect the current quarter corporate results to be good. As such there is every possibility of the Nifty slipping back to an overall negative trend after the results season starts. It is difficult to predict where the Nifty will be but I think it will be between 7900 and 8300, probably around the mean of these two levels.
- The October to December quarter is normally a good one for business and the demand will pick up for most businesses. If the NDA wins in Bihar and there are further rate cuts then the markets can potentially get to a much higher level. I do not see levels of 8700 to 9000 as being unrealistic if the January results for the quarter are good.
- The flip side of it is that the NDA loses in Bihar and legislation gets into a quagmire. In this scenario, I think the Nifty will do worse but the range will still be around 8500 by January middle.
So there you have it – a Nifty level between 8500 and 9000 in the next 3 months is the most likely outcome. I think we will get to see 9000 by early January and if events really pan out well then even prior to that. What does this mean for your investments and how should you plan these? Wait to read my next post for those suggestions.