India equity markets nervous on delay in realization of expectations:
India equity market gave thumbs up to expectation of change of guard in the Government, building hope (and optimism) on Narendra Modi. Since February 2014 (on run upto May 2014 General elections), NIFTY has rallied by over 50% (from 5933 to 8966) while BNF has outperformed with over 110% rally from 9944 to 20907. During the same period, DJIA index is up by only 18% from 15340 to 18103. From these data, it is obvious conclusion that stake-holders have built euophoria around execution capabilities of Narendra Modi with foreign investors leading from the front, going for the kill. It is not surprise to see loss of momentum in the euphoric rally in the absence of delivery (to over expectations) and resultant delay in realisation of beneficial impact on the ground. At this stage, there is lot of noise around, with Modi working on establishing linkages with investors (global and domestic) to pull monies to expand capacity and consumption. The pipeline positive cues from rate-cut and India sovereign rating upgrade has set up strong base in NIFTY above 8450 (ahead of worst case scenario of 7950-8075), while BNF is firm above 18200 (ahead of 17500). The major uncertainty however is from foreign investors appetite on India equity against US economic revival and resultant shift into rate-hike cycle by the FED.
What next? Limited upside, but no fear of significant reversal
Is the NaMo re-rating gone beyond reality? The uncertainty ahead is the extent of bullish extension beyond all-time high in NIFTY at 8996 and BNF at 20907. More the delay in delivery to expectation will lead to unwind of post-NaMo rally (NIFTY into 7100-7400 and BNF into 14350), but do not see risk this far at this stage with firm short term base in NIFTY at 8450-8600 and BNF at 17500-18200 (seen as cheap-to-acquire for long term strategic play); cues in favour are from improved macroeconomic fundamentals, dilution in growth-inflation conflicts and adequate external appetite on India, seen as relatively safe-haven among emerging (and developed) markets. All taken, it is prudent to retain strategic focus on NIFTY at 8450/8600-9000/9150 and BNF at 17500/18200-20300/21000. It is possible that any rally driven by rate-cut and/or rating upgrade will be short-lived till the Government gets into "walk-the-talk" mode to set sustainability beyond 9000 in NIFTY into 9500-10000, seen optimistic at this stage. As of now, have set NIFTY at 8450-8600 as cheap-to-acquire zone and 8850-9000 as hot-to-hold zone for strategic play; don't see cues to review this approach, but stay in hope that positive vibes in the Budget 2015 could lead to shift of hot-to-hold zone from 8850-9000 to 9150-9300 while disappointment would trigger reversal below 8450 into 8000-8150. Both combined, big-picture range is set at 8000/8150-9150/9300 for rest of FY15.
DJIA is in consolidation mode as per script with back-and-forth play at set near-term focus range of 17000/17100-18000/18100; since mid-Dec'14, have seen moves from 17069 to 18103 to 17037 to 18052. The tone ahead is mixed, but seen good to review the near term focus at 17500/17600-18500/18600 for back-and-forth play. This outlook extend support to India equity market to dilute bearish momentum from domestic cues.
Over all, the visibility ahead is not clear while investors look for earnings to catch up with stretched valuation. Hence, the need to be cautious and stay fleet-footed given the lack of conviction on directional bias.
Moses Harding
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