Some crystal ball gazing for the equity markets

One of the things that I genuinely find irritating is when people tell me that anything can happen in the markets and therefore it is senseless to predict it. What is actually making no sense is to buy equity regularly without a care as to what level you are buying it at. Thus, even though I myself have subscribed to the philosophy of standard SIP for the last 7 years investing about 20 lacs in it, I have finally figured out the fundamental flaw in the approach.

Do not get me wrong here – the market movements are a lot of complex dynamics and there is no mathematical modelling possible to predict it, though enough people have been trying to do so for a long time. However, if you are aware of the business, economic and political fundamentals then it will be possible to forecast the broad medium term trends of the markets. This does not mean that one will get it right all the time, but even if you do so a majority of the times you will do very well for yourself.

What are the main factors that have a say in the Indian markets generally? The most important ones are as follows:-

  • Even today our markets are largely driven by FII money, so an inflow of this will help in raising market levels and an withdrawal of this will result in market corrections.
  • Whether FII money will come in or not depends to some extent on how they need this money for other global markets. So if they want to invest in Brazil or China, it is inevitable that they will have to withdraw money from the Indian markets.
  • FII reaction to negative news flows or sentiments is normally quick. In the last Lok Sabha election they bought into the market on the basis of exit poll predictions. Similarly this October they have been selling off thinking that there is a good chance for the BJP to lose the Bihar elections.
  • Company earning is of course the most important factor for an individual stock performance and the aggregate of all such performances have an impact on the overall market levels. Earning improvements have been expected for the last 2-3 quarters but such hopes have been belied.
  • Individual stocks can be badly impacted by negative news. For example DRL stock suffered heavily today as the US FDA issued a warning to the company. This not only had a sharp cut in the DRL price but also affected the overall sentiment of the market in a negative manner.
  • The overall political environment with specific links to policies and legislation also drives sentiment. The positive sentiment of the change in government in 2014 led to hugely positive sentiments and a spectacular rise in the markets. Similarly the failure of the government to get some of the key legislation done successfully has let to negative sentiments and have caused the markets to languish.

With an understanding of the above framework is it possible to call the Nifty levels in the medium term of 3-6 months? The significant events will be the Bihar results, the US Fed rate hike, the Q3 results, the lead up and aftermath of budget, Annual results, the state elections, monsoon outcome etc. While predicting the route the Nifty will take is almost an impossibility, I do think that 7000 level will find very strong support and it will be nearly impossible to cross 9000 for the Nifty. Within this 2000 points play, a much more likely range is 7500 to 8500, unless something really exceptional occurs in the business and political scenario either within India or globally.

With the caveat that I may be quite wrong, what should be the investment strategy in equity for the next one year if this range holds? Obviously, you want to buy at 7500 rather than 8500 but how to arrive at a mechanism for doing so? I will write about it in the next post.

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