English (India)

Nifty fades Thursday even after a blockbuster election win by Indian PM Modi as the market turns attention from politics to economics, which is not in a great shape

calendar 24/05/2019 - 08:01 UTC

The Indian market (Nifty Future) closed around 11713.75 Thursday, slips almost -0.58% and moreover tumbled from the session high of 12070.00 to a low of 11640.15 in a roller coaster day of trading even after a blockbuster election win by Indian PM Modi as market turns attention from politics to economics, which is not in a great shape at this moment. The Indian PM Modi and his party BJP/NDA got an unprecedented 352 seats out of 542 and much more than the required majority mark of 272 and polls of exit polls (average) expectations of around 302 seats.

On Thursday, Nifty Future soared to the session high soon after the market opens as by then it was clear that BJP/NDA will get much more than the 272 mid-way marks, ensuring policy continuity of Modinomics-I. But at around 12000 Nifty and TTM EPS of around 401.70, the Nifty PE would be around 29.87, is in bubble zone. Similarly, at around 31700 of Bank Nifty and the TTM EPS of around 483.20, the current PE would be around 65.60, at very stretched valuation. Nifty and Bank Nifty PE are both much above the average historical PE of 20 despite hopes of earnings and NPA recovery.

Although Nifty surged almost +100% under Modinomics-I (Jan 2014/pre-Modi rally of 6000 levels to 12000 now in June-2019), Nifty EPS has grown only around +11% in these 5-years (from around 362 in June-14 to around 402 currently); i.e. real (inflation-adjusted) EPS growth of Nifty is actually negative. It’s clear that despite the appeal of Modinomics, EPS failed to match the surging PE. And valuations are quite stretched as in the last decade, there was an earnings recession (after 2008 GFC). This is despite India’s reported GDP growth of around 7% on an average (CAGR), be it under UPA-II (so-called policy paralysis) or NDA-I (Modinomics/green shoots and appeals of 4-D: demand, demography, deregulation, and deregulation).

Some of the reasons for earnings recession of Indian corporates despite a stable government (UPA-II or NDA-I) and so-called booming economy are may be higher borrowing costs, higher leverage (unsustainable debt), too much corporate greed for unviable expansion and diversification financed by debt, policy paralysis (UPA-II), judicial over-activism (2G, metal mining cases and subsequent project disruptions/cancellations resulting in dual balance sheet stress), stalled projects, falling currency-INR (negative for foreign currency debts) and India’s twin balance sheet problems (stressed corporates and banks-NPA).

Now, after the election, the market will turn its focus from politics to economics, which is not in great shape currently from surging fiscal deficits to subdued consumer spending, worsening un/under-employment situation, muted economic and real wage growth coupled with sticky core inflation, hovering around +5%. Indian middle class is not earning enough to boost the country’s discretionary spending. Also, as the country is converting gradually from black/unaccounted economy to white (accounted) for the last 10-years (even before DEMO), this is affecting India’s high-value consumer spending, which was traditionally back money oriented.

On Thursday, Nifty tumbled from the session high despite a mega-win by Modi as the market was already discounted to a large extent for such Modi victory. So this is another example of buying the rumor and sells the facts/news. Nifty (spot) has already jumped almost +20% in the last 8-months (Oct-18 low of around 10004 to the new lifetime high of 12041 scaled Thursday) and +8% for the year (YTD/from Jan’19) on hopes of Modinomics/NDA-II. Thus, Thursday’s market volatility may be also termed as profit booking (long unwinding) and also position sizing by smart money (institutions).

Another point may be that the market is concerned about the 2024 election as at that time Modi will be not available/eligible for the PM post. It’s beyond any doubt that in both in 2014 and 2019 election, most of the public had voted for Modi as a credible leader and not for the BJP (as a party line/ideology). It’s Modi’s charismatic leadership quality, clean image with a nationalistic flavor and lack of alternative credible leaders (PM candidate) among the fragmented opposition has helped the BJP for such blockbuster win both in 2014 and 2019 all over India, irrespective of the general party line.

But in 2024, there will be no Modi magic and thus BJP now needs to project/groom a leader, capable of matching Modi’s brand of politics and economics. This is not an easy job even for the BJP. Thus, the market may be concerned that after NDA-II, there may be significant political and policy uncertainty. One of the probable candidates for next PM in 2024 (after Modi) may be the present railway minister Goyal, (who is also likely to be the next Finance Minister). Also, Gadkari and Amit Shah are prospective PM candidates for 2024. But they can’t match the Modi wave in any way.

Looking ahead, the market will also focus on NBFC crisis (India’s version of subprime crisis), next FM, a full budget, the government’s balancing act in fiscal stimulus and fiscal balance (prudence), bold reform initiative and any rating upgrade by the global rating agencies.

The market may be also concerned that blessed with super political majority and a record high stock market, Modi may again call for a debate on LTCGT (long term capital gain tax) to balance some fiscal deficit and to also ensure “a modest contribution for the development of the nation by the booming capital market”.

Thus the overall rally may be limited considering negative global cues and as the state of the Indian economy is not in great shape either, irrespective of Modinomics-II. The market now likes to see critical reforms, even if it may not be turned as “big-bang”. The market also wants to see fiscal discipline rather than political populism.

The market wants to see labor market reform, credible official regular economic data on unemployment and wage growth (like NFP in the US), retail sales (consumer spending), a fully convertible rupee (INR), ease of doing business in India, reform in Indian railways to make it private (private railways under like private airlines under AAI, proving infrastructure), lower borrowing costs, simplification of GST (with a single rate and less complication for return filling) and lower regulatory charges/taxes in various sectors including petroleum fuel coupled with direct tax reform/cut, especially corporate tax.

India is also a high tariffs country, which needs to be lowered because the combination of higher tariffs and higher USD is making the cost of raw materials higher for Indian manufacturers. India also needs to lower its borrowing costs (bond yield, rbi rate) to at least 4-5% and strengthen its currency (INR) significantly (40-50 to USD) for a competitive economy like at least South Korea, even if not China. In order to improve the country’s fragile per capita income, India needs to focus more on exports taking the opportunity of present U.S.-China trade war and also as the country’s domestic consumption is now saturating.

On Thursday, the Indian market was dragged by banks & financials, automobiles, FMCG, techs, metals energies (lower oil), consumption and MNC (nationalistic BJP/Modi government) while helped by media (election time, IPL and world cup-cricket coverage—high TRP), reality and infra (hopes of higher infra spending-rural, road and rail).

Nifty was helped by Indusind bank, ICICI Bank, L&T, Adani ports (close to BJP government), Grasim, ZEEL, Cipla, Powergrid, Kotak Bank and Hero motors. Nifty was dragged by HDFC Bank, ITC, HDFC, Infy, TCS, RIL, Bajaj Fin, VEDL, Bajaj Fin service, and ONGC.

On Thursday, the Indian 10Y bond yield made a low of 7.191%, slumped almost 7 bps and the lowest since Dec’2017; it was also more than 100 bps down from the September 18 high of 8.231%. It’s currently trading around 7.214% on optimism about Modinomics-II.

On Thursday, USDINR made a low of around 69.34, near the 9-months low of 69.05, but later recovered and made a session high of around 70.23, before closing around 69.96. It’s currently trading around 69.70 and edged up to around +0.06% for the month of May (till now) after a rally of around +0.67% in April, but it’s still well-off the October’18 high of 74.49.

On mid-Friday, Nifty Future is trading around 11830, surged by almost +1.20% after making a session low-high of around 11678.10-11844.50 as the market is celebrating with a cautious tone amid hopes & hypes of Modinomics/NDA-II; lower oil is also helping. Oil marketing companies (OMC) are helping on lower oil (Brent crude) and a high probability that the government will now allow them to increase retail prices significantly after a gap of almost 3-months amid election (political compulsion). Banks, especially PSBS are helping on hopes of RBI rate cuts and faster recaps coupled with NPA (NCLT cases) recovery.

Technical View (Nifty, Bank Nifty, and USDINR-I):

Technically, whatever may be the narrative Nifty Future (NF) now has to sustain over 11905 for a further rally to 11950/11990 and 12105*/12220-12315/12410 and further 12545/12625-12715/12785 in the near term (under bullish case scenario).

On the flip side, sustaining below 11885-11800, NF may fall to 11730/11690-11665/11625* and 11575*-11500 and further plunge to 11455/11415*-11350/11300* and 11230/11135*-11075*/11030 in the near term (under bear case scenario).

Technically, Bank Nifty Future (BNF) now has to sustain over 30950 for a further rally to 31210/31325-31450/31650 and 31800*/31975-32175/32375 in the near term (under bullish case scenario).

On the flip side, sustaining below 30900, BNF may fall to 30700/30650-30450/30300 and 30200/30100-30000*/29750 and 29500/29300-29150*/28900 in the near term (under bear case scenario).

Technically, USDINR now has to sustain over 69.05 for a rebound to 69.85*/70.10-70.45/70.85* and further rally to 71.55/71.90-72.15/72.65 and 72.95/73.65-74.00/74.50 in the near term (under bullish case scenario).

On the flip side, sustaining below 68.90, USDINR may further fall to 68.20/67.50*-66.95/66.35 and 67.50/66.65-66.25/65.30 and 64.80-63.95 in the near term (under bear case scenario).


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