Indian markets ended the month of December marginally in the red. The BSE Sensex closed at 26,959.5, while the Nifty closed at 8,185.8, down 0.1% and 0.5%, respectively. Both midcaps as well as smallcaps underperformed with the Nifty Freefloat Midcap 100 Index moving down by 3.7%, while the Nifty Freefloat Smallcap 100 Index was down 1.0% during the month.
“The subdued performance was attributable to global events, outlook on interest rates from the US Fed, domestic monetary policy and announcements/updates on the reforms front. Global events led to an outflow of FII funds. However, DIIs were net buyers during the month, thereby supporting the markets to an extent,” YES Securities said in a research report.
According to the report, the stock market movement in January would depend on:
1. Quarterly earnings: The stock markets would be closely tracking the earnings announcements. In the current quarter, there could be an earnings impact particularly in sectors wherein cash transactions tend to be high, including consumer-driven sectors, retail, autos, etc. However, as liquidity conditions improve, consumption-driven growth would come back to support earnings and would lend support to the upward movement in the capital markets as well.
2. Union Budget and developments on the reforms front on the domestic side, particularly those with respect to the rollout of GST and tax reforms.
3. Geopolitical developments particularly in the US as the new President would start his term towards the end of the month and developments in the Eurozone and UK.
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In terms of valuations, the Sensex and the Nifty are trading a forward PE multiple of 18.6x and 18.3x, respectively. The earnings numbers to date indicate that while some sectors have clearly outperformed expectations, but expectations have been revised downwards consistently over the past few quarters. Prior to demonetization, the emerging trend had suggested that there was been a definite improvement in indicators like vehicle sales, tractor sales, sale and prices of agri commodities, manufacturing and service PMI, lending to retail & services, etc. At the same time the data for October saw a marked improvement as festive demand, benefit of normal monsoons leading to a revival in rural demand and 7th Pay Commission payout boosted consumption and order inflows.
“Though post demonetization, these indicators have suffered a setback, however this is a short-term thing and we expect the upward to trend to resume as the liquidity crunch n the economy eases. As such, we believe that it is just a matter of time before the reforms and structural steps introduced by the government start yielding results, which in turn would help the laggard indicators to turn around and support growth both for the economy and consequently for the corporate earnings,” said YES Securities.
“If we factor in a recovery in earnings growth (for reasons highlighted above) and continued momentum into FY18, valuations do not look expensive from a long-term perspective. Therefore, near-term dips provide a good opportunity for picking up quality stocks for the long term. In terms of sectors, we remain positive on autos and auto ancillaries given that they enjoy a multiplier effect to economic growth; infrastructure and capital goods given the government’s focus in that area and agri stocks which would benefit from the growth seen in acreage and sowing during the Rabi season on the back of good monsoons and water reservoir levels,” it said.
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On a technical basis, the Nifty Index has entered into a sideways consolidation phase, taking support at the 50% Fibonacci retracement level, i.e. 7890. Currently, it is approaching resistance zone of 8270-8325 (upper end of the consolidation & 113% Fibonacci retracement). Breakout from this range, i.e. 8325, on higher volumes can take it to levels of 8360 being the downtrend line resistance. Moreover, a close beyond the downtrend line resistance of 8360 can extend the rise to levels of 8460-8510. However, failure to cross and close above 8325 can resume the corrections, dragging it lower to levels of 8108-8050.
The Nifty Bank Index has been oscillating in a declining channel pattern, indicating corrective wave active at the moment. Currently, it has turned up forming a hammer candlestick pattern after testing the lower end of the channel placed at 17606. Further, a sustained trade above 18300 on higher volumes can take it higher to levels of 18700-19110. Moreover, a close beyond 19110 on higher volumes can trigger a breakout from the channel resuming the bull trend. Above 19110 it can test levels of 19440. However, a close below 18050 may drag it to the lower end of the channel placed between 17606 and 17520.
Given that the long-term trend for the markets is positive, which will be driven by an expected turnaround in the earnings which in turn would be a function of the economic recovery, “we suggest that any corrections should be used as an excellent opportunity to pick up quality stocks,” said YES Securities.