In the last month, the Indian equity market got a bit unstable. Nifty50 had corrected by 7 percent from the monthly high to low. It was factoring in the sudden rise in second wave infection & state elections anxiety. Currently, we are undergoing a pullback in anticipation of good Q4 results. The MoM performance has improved but still negative at 2 percent compared to positive 5 percent in the US market.
Virus second wave is bigger than the first attack with a variant at strong infection. Initially, it was feared that it will ruin the pace of domestic economic recovery. The implication to the market was assessed to be high because it was already trading at a high valuation, snowballing its vulnerability. It was dread that it will lead to a heavy downgrade in Q1FY22E earnings, the ongoing quarter.
Post the announced lockdowns, it was assessed that it will not have a meaningful impact on future GDP growth. It will have a maximum downgrade of 20 to 40bps in FY22 GDP as the broad economy maintains its productivity supported by low mortality rate, fiscal & monetary reforms. As per global data, the second wave attack can prevail for 2 to 3 months, which is expected to decline in India backed by lockdowns, summer season, and progress in vaccination.
Regarding states election, even on a worst-case basis, it is not going to change the trend of the ongoing economy and central policies. So, it should not impact the long-term trend of the market. As per consensus, the central government may have the opportunity to add its political stature, which may help the stock market and economy in the future.
The volatility was also subjective to the upcoming monetary policy meeting. On a positive note, the Indian market was shunt by the long-term dovish stance taken by RBI. The idea is to maintain an easy money policy till the economy reverts to normalcy. A big cheer was the bond-buying program of Rs 1 lakh crore to ensure liquidity and to flatten the long-term yields curve. RBI’s decision to maintain its high GDP growth forecast and recapitalization of a key financial institution like NABARD also helped the market to calm down, economic dread had increased post the second wave and stringent lockdowns.
We should be positive on the equity market because we have a good chance to generate decent returns in FY22-23. We may have volatility in the global & domestic market, during the year, due to high oil prices, likely slowdown in stimulus (liquidity), rising inflation & interest rate, high valuation, and NPAs. But we should not be concerned too much because the economy is just coming back to its reality of growing business & profits. The economy is verging towards normality, which is the main reason for the rise in commodity prices, inflation, and short-term interest rates. The valuations are high but supported by high earnings growth, liquidity, and fiscal programs. We are bound to stay between high valuations, during a period of a lifetime pandemic, low EPS base, high future growth, and liquidity.
It is highly possible that Q4 can help the market to move further ahead. The earnings growth is forecasted to grow at a very high double-digit, which is of course supported by a low base, but the outlook will stay buoyant in the coming quarters for the majority of sectors. We can revert to last high on a short-term basis and even to new highs on a medium to long-term supported by optimistic monetary policy & fiscal reforms in both domestic and international market in a progressive vaccination. Earnings growth will have a revamp in 2021 and 2022. In Q4, key sectors which are looking at high growth are Metals, Private Banks, and manufacturing segments such as electricals, capital goods, Auto, and Cement, along with evergreen IT, Chemical, and Pharma.
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