Fundamentals Can Hold The Markets, Despite Geopolitical Tensions
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.