Will markets fall? Will markets rise?

 The SENSEX had touched a high of 67,500 on the 20th. Of July and since then has been consistent around the 65,000 mark. The other major indicators are also showing strength and greater than the SENSEX. The BSE LARGE AND MIDCAP 250 has shown the resilience and continues to show a big gap up over the SENSEX. The BSE SMALL CAP index and the BSE 250 LARGE AND MIDCAP are also ahead of the SENSEX but not as much as the BSE 500. What it means is that the action and focus of the market has moved on from the very large listed companies to the scrips that populate the larger indices. The NIFTY TR INDEX continues to show the same pattern as the SENSEX and the gaps with the other mentioned indices are also largely the same. This again points out to a play happening on the smaller companies having a larger share of the market player’s focus as well as share of the wallet.

What are the reasons the markets will remain where they are or better yet, show an upward trend?

Well the primary reason is the earnings declared so far (and of course these constitute the bulk of the listed space). Overall earnings have been great to say the least. Sectors like Aviation, Auto and Auto Ancillaries, Crude are up by a 100% and there are a few which are up by 50%. The nervousness in the Realty, Chemicals and some other small sectors are of course a concern but the rise in these industry segments has been very sharp. Overall the earnings growth across has been nearly 40%. Sustaining this kind of a growth number will be a difficult task but even if future numbers get halved, the growth will be tremendous.

What’s driving these numbers? Overall normalization of the economy post Covid seems complete. So much so that even rural income and demand seems to be on the right track. The performance of the demand side from the rural and semi urban part of the economy has been very encouraging and if we see the continued normalization and subsequent growth in these two economy segments, a significant demand push will definitely make a big difference to company top lines. The Government is ensuring capex so that these sectors continue to be buoyant and policies are also being implemented to see a revival of private sector investment. Capacity addition has not happened in a long time in a number of capital intensive industries like power generation and distribution, engineering, capital goods and we are very near the situation where there will be no excess capacity. This will be a driver for private capital spends. Since India is a consumption and investment driven economy, improvements in both these sectors will provide a fillip to individual incomes, consumer spend and subsequently aggregate demand.

What could upset this neat layout of positives? Inflation is a big worry. With demand and incomes rising, inflation tends to be the natural bedfellow. Already consumer inflation (as of yesterday, 15th August) was nearing the 8% mark. The turnaround of the agri prices to highs, given the patchy weather cannot be predicted. The other big problem is crude oil prices which are hovering around the Rs. 6700 per barrel mark. There are any number of reasons to drive these even more and we will need to hope and pray that these adverse reasons do not play out. The last of the big worries is the INR to US Dollar. The Rupee has been a weak currency and even though it showed signs of resilience, it does so to deceive and fall. The rupee is at a very crucial level and it seems the Reserve Bank of India is geared to see the INR stay below the 83 mark (to the USD). With 600 billion USD in its coffers, the resource is certainly there but how and when the RBI intervenes is way above my pay grade. It will be disastrous if it were to touch the 84 mark. If this danger level is touched there is likely to be a rush of investors out of their equity position as their investment would be worth less in USD terms but let’s keep our fingers crossed and hope it does not happen.

In the short term, I do not expect the SENSEX and the other indices breaking more than 5-7% which is quite normal. However I don’t see a fabulous move up either. 70,000 0n the SENSEX or 21,000 on the NIFTY is still some way away but have no doubt it is there and will happen soon. Be ready and structure your portfolio to reap the rewards 6-8 months hence.

Prasunjit Mukherjee