How will Nifty behave in the next year and why

It is rightly said that predicting the market levels in the short to medium term is fraught with the hazard of you looking really silly. However, the trends in the market are easier to predict and, with some knowledge and experience in the markets, you  will probably get it right more times than you get it wrong. Let me therefore attempt to try and give some overall predictions of the NIFTY trends between now and March 2018. I have tried to keep all explanations in simplest of languages and devoid of any jargon.

To begin with one will need to understand the key factors behind market performance in our situation. The determining factor in the markets is the amount of money pumped in and out by the FII’s. Most people do not understand this and keep looking at other reasons which are not quite so important. Now, the FII money will come in when they feel putting money in Indian markets is going to be better for them as opposed to other developing or developed markets. However, it can also go out when it becomes apparent to them that some other markets are relatively more attractive.The other important factor for the markets is of course the growth in corporate earning. As we all know real growth or the potential of it will help market up move and vice versa. The third important factor is some structural issues in particular industries, for example Metals, IT , Pharma etc. This may not effect all companies but if the sector has a good representation in the Index then the impact on the market levels can be serious. The final factor is sentiment based which is normally news driven – again either real or perceived facts.

So what is the environment really telling us right now. While there are many issues the most important ones are as follows:-

  • The US elections are expected to result in a win for Hillary Clinton. If Donald Trump manages to pull off an upset that will be a shock for the markets. This will be a bad news for Emerging markets as more money may flow into US at our cost.
  • The Fed rate hike is a given and this is again a negative trigger for the FII money to see a sell off.
  • Our own interest rate cycle is probably bottomed out or there is at most one more cut amounting to 25 bps. The bad news is that the stock price movement in the rate sensitive stocks we have seen lately will now come to an end.
  • Sectors such as IT, Banking, Pharma which are vital to the NIFTY are having serious structural issues now and are likely to see serious declines.
  • In general corporate earning growth has again disappointed this quarter and now the whole pressure will be in the next 2 quarters to deliver this FY. Given the indicators in most sectors this does not look very likely.
  • Auto sector, Consumer durable and the FMCG sector are likely to do well based on the good monsoons and 7th Pay commission outcomes.

As you can see from here, there are very few factors which are positive for our markets. I think the trend is clearly going to be negative and a 5 % correction on the Nifty is quite imminent. In case there is a major FII sell off then the correction will be way deeper and it can easily be 10 % or more. Over the next six months local factors such as the budget, assembly elections, GST implementation etc will hold sway and the outcome of most of these are again likely to be negative for our markets. I therefore anticipate further weakening of the Nifty till March of 2017 or so. Thereafter, assuming that there are no real shocks for the rest of the year in the global economy and markets, money is likely to flow into the Indian markets and we should end 2017, probably at the highest point of the year.

What are the Nifty levels we are talking about? Probably a low level between 7000 and 7500 by March 2017 and a high level between 9000 and 9500 towards end 2017. While the level of 7000 can be breached I do not feel this will happen for the 9500 level. Do remember that levels are far harder to predict and all numbers here should be taken as indicative and not absolute by any means.

Assuming that this is a reasonably accurate projection of the next 15 months, how will it be affecting your existing investments ? How will it make sense to invest in this period? Let me address it in another post.

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