Fun­da­men­tals Can Hold The Mar­kets, De­spite Geopo­lit­i­cal Ten­sions

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In­dian bench­mark in­dices wit­nessed a fresh break­out at the end of last week, but were in­stantly shad­owed by a pull­back. The cur­rent week started off with es­ca­lat­ing geopo­lit­i­cal ten­sions as North Korea tested its big­gest nuclear weapon and hinted at more tests to come in the fu­ture. Mar­kets nose­dived for the day and has been con­sol­i­dat­ing there­after. Re­act­ing to the North Korean provo­ca­tion, South Korea has read­ied it­self for war against North Korea, with the US mil­i­tary plac­ing more launch­ers. South Korea has de­ployed mis­sile de­fence sys­tem to counter any at­tack from North Korea. Grow­ing ten­sions be­tween these coun­tries may af­fect the mar­kets world­wide in the up­com­ing ses­sions. The catas­tro­phe could prove to be pow­er­ful enough to breach ma­jor sup­port lev­els of the In­dian bench­mark in­dices.

On the do­mes­tic front, the Govern­ment of In­dia has ini­ti­ated stricter norms for shell com­pa­nies, whereby di­rec­tors of com­pa­nies which have failed to file tax re­turns for three or more years would be barred from tak­ing any fur­ther stakes or re­tain­ing them­selves as di­rec­tors. The list of such di­rec­tors is ex­pected to reach at least 2-3 lakh. To curb sit­u­a­tions aris­ing at this stage, SEBI is also mulling fur­ther tight­en­ing at ini­tial list­ing stage it­self. This could bring down the num­ber of com­pa­nies rais­ing cap­i­tal through the eq­uity route to be­come a ve­hi­cle for money laun­der­ing and tax eva­sion. The con­se­quences of these changed norms would look like a short-term hic­cup for the mar­kets, but these changes are ex­pected to at­tract both DII and FII in­flows in the long run. Though, over the past cou­ple of weeks, the FIIs have been net sellers, while DII have been net buy­ers.

Speaking on the long run, the Modi govern­ment is seen en­ter­ing the im­ple­men­ta­tion phase of the ‘Smart City’ ini­tia­tive, which can be viewed as a strat­egy to re­tain its po­si­tion dur­ing 2019 elec­tions. The Cen­tre and the states to­gether have recog­nised 261 projects un­der the ini­tia­tive with a to­tal out­lay of Rs 32,600 crore. Hence, we can ex­pect good mo­men­tum in in­fra­struc­ture, realty, con­struc­tion, ce­ment and util­i­ties sec­tors.

All-in-all, geopo­lit­i­cal ten­sions may bring in some cor­rec­tions in the mar­ket, yet we hold our pos­i­tive view in the long run. The peak is not yet made and that the fun­da­men­tals at the re­cent mar­ket highs are still lower than the 2008 peak. Be it the yearly price move­ment of Nifty at 59.9% in 2008 as against 17.1% in 2017, or P/E at 28.29 in 2008 as com­pared with 25.75 in 2017, the num­bers are still lower than 2008. As stated ear­lier, the mar­ket cap-to-GDP too came in at 3.16 in 2017 as com­pared to 3.4 in 2008. Cor­po­rate earn­ings too posted a sin­gle digit growth in 2017 with EPS at 7.38% ver­sus 19.12% then.

The big­gest trig­ger to boost the mar­kets fur­ther are re­cov­ery in cor­po­rate earn­ings in the sec­ond half of the year with reper­cus­sions of de­mon­eti­sa­tion pe­ter­ing out and pos­i­tive out­comes of the GST roll-out kick­ing in. Tech­ni­cally speaking, Nifty is likely to sus­tain op­ti­mism un­less it hits be­low 9685, fol­lowed by 9445 in the first place, fol­lowed by 9340 there­after. How­ever, mar­kets are not likely to rush in for im­me­di­ate up­side also.

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