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Nifty May Again Scale Lifetime High on Hopes of Fed/RBI Pivot; What’s Next?

Published 01-08-2023, 08:28 am
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India’s benchmark stock index Nifty snapped two days losing streaks Monday and surged +0.48% to close around 19740.90 on positive global cues after softer than expected U.S. core PCE inflation and hopes of a Fed pause, at least till 1st November’23. Also, less hawkish BOJ YCC tweak and mixed report card helped; the market is now expecting a Fed/ECB pause in September.

Now from global to local, Nifty scaled a new lifetime high of 19990.80; i.e. almost 20000 on 20th July. Overall Nifty soared almost +12% since Mar’23 and was primarily supported by an FII boost amid improving domestic macros, solid corporates earnings, the appeal of Modinomics, and India’s 6D (demand, demography, democracy, deregulation, development, and digitalization), coupled with political & policy stability and hopes of Fed/RBI pivot. Nifty surged +2.82% in July after 4-consecutive months of gain, totalling around +14%; but Nifty also stumbled from the recent lifetime high of around 19990 to 19568 on Friday (28th July) amid softer than expected report card (earnings and guidance) and negative global cues.

The Indian capital market is also enjoying a valuation/scarcity premium among comparable emerging market economies (EMEs), and FPIs are now scrambling for India, considering the currency/macro/policy/political stability along with well-managed blue chip companies, improved corporate governance, strong banks & financials, and deleveraged corporates. India is now enjoying the benefit of a vibrant economy and democracy, a rare combination in the EM world.

In the last 30 days, the Indian market was boosted by media, PSU banks & financials, selected private banks, realty, pharma, metals, energy, infra, automobiles, techs, and FMCG to some extent. Individually, Nifty was boosted by Cipla (NS:CIPL), NTPC (NS:NTPC), ONGC (NS:ONGC), Hero MotoCorp (NS:HROM), Tata Steel (NS:TISC), Hindalco (NS:HALC), DRL, Sun Pharma (NS:SUN), L&T, Tata Motors (NS:TAMO), SBI (NS:SBI) and ICICI Bank (NS:ICBK), while dragged by UPL (NS:UPLL), HCL Tech (NS:HCLT), Eicher Motors (NS:EICH), Mindtree (NS:MINT), HUL, Britannia (NS:BRIT), Axis Bank (NS:AXBK), HDFC Bank (NS:HDBK), and RIL to some extent.

On Monday (31st July), the Indian market was boosted by metals, energy (higher prices due to Chinese optimism), techs/ITs (overnight Nasdaq optimism), automobiles (upbeat monthly sale), infra, realty, media, banks & financials, and pharma to some extent, while dragged by FMCG. Nifty was boosted by RIL (Jio Finance optimism), TCS (NS:TCS), HDFC Bank, Infy, NTPC, L&T, Powergrid and Tata Steel, while dragged by Kotak Bank (succession issue), ITC (hotel demerger issue), Bajaj Finance (NS:BJFN), HUL, Apollo Hospital, HDFC Life and Bharti Airtel (NS:BRTI).

Nifty EPS grew by only +6% in FY23 and is projected to grow 6-10% in the coming years on average:

At around 858 TTM EPS (FY23), the current Nifty PE is around 24.00 against the average fair PE of 20. So far, the Nifty EPS trend in Q4FY23 is subdued at around 858 against Q3FY23 levels of 850. The FY22 Nifty EPS was around 809, while the market is expecting around 875 in FY23 (Q4FY23), i.e., an annual growth of around +8%. For FY23, at around 858 EPS and an average PE of 20, the fair value of Nifty should be around 17160 (fair valuation for Mar 22). The FY: 24-25 projected fair value may be around 18550-20050, while FY26 fair value may be around 21650.

At the present trend rate, the projected FY24 Nifty EPS may be around 927 assuming +8% annual growth, and at an average PE of 20, the projected fair value may be around 18536. Further, if we assume +8% annualized growth in Nifty EPS in FY: 25-26 (depending on actual Fed/RBI rate action, Russia-Ukraine war, and inflation trajectory), projected Nifty EPS maybe around 1001 and 1087, which translates to a fair value of Nifty around 20019 and 21621. As the financial market usually discounts 1Y EPS in advance, Nifty may scale 20050 by Dec’23, 20775 by Mar’24, and 21650 by Mar’25 while FY23's fair value may be around 18500-17100.

The Q4FY23 Nifty EPS was around 858 against 850 sequentially (+0.94%) and 809 yearly (+6.06%); at this and the previous average QTR/YLY run rate, Nifty consolidated EPS may grow around 1.5-2.5% sequentially or 6-10% yearly for FY: 24-26. The subdued Nifty earnings are due to lingering global macro-headwinds, geo-political tensions, and resultant sticky elevated inflation, both locally and globally, and higher borrowing costs are affecting discretionary consumer/corporate spending, affecting earnings.

Suppose inflation indeed comes down and RBI/Fed goes for pause/pivot, i.e., rate cuts in early FY24 (ahead of the general election). In that case, Nifty EPS may grow around at least +10% CAGR rate on an average considering huge fiscal/infra stimulus, growing affluent middle class, and higher USDINR (growing policy/macro divergence between RBI and Fed)-positive for export savvy Nifty blue chips (almost 60% of Nifty earnings comes from export). Subdued external trade amid the chorus of synchronized global stagflation/recession may affect Nifty EPS despite upbeat domestic macros. Overall, if India’s real GDP grows around +6% and core inflation/inflation also grows around +6%, then Nifty earnings may also grow around 6-10% in the coming days.

India is now enjoying scarcity premium not only among EMs but also DMs due to political & policy stability (Modinomics), the mantra of reform & performance, and the appeal of 6D (development, demand, demography, democracy, deregulation, and digitalization). India has a strong banks & financial system due to a strong capital buffer and regulatory system. India’s low external debt and manageable trade deficit are a huge advantage compared to many EM peers.

But India’s inflation/core inflation may be bottoming out and may again surge in the coming months:

On 12th July, the MOSPI data shows India’s headline/total CPI annually (y/y) surged to +4.81% in June, from +4.31% in May, higher than the market consensus of +4.60% and accelerated for the 1st time in 5-months amid higher food and fuel cost coupled with elevated housing, clothing & accessories and misc. items. On a sequential basis (m/m), India’s total CPI jumped +1.01% in June from +0.56% in May and the largest monthly gain since Apr’22.

India’s core CPI also edged up +5.10% in June (y/y) from +5.02% in May. Overall, the 3M (NYSE:MMM) rolling average of underlying headline CPI may be now running around +6.00%, while core CPI is now running around +5.50%, both still substantially above RBI’s target of +4.00%. Also, an overall trend may be indicating inflation may be bottoming out and we may see structurally higher inflation/core inflation in the coming days amid higher/elevated logistic costs, lower crop production amid unfavorable/extreme weather, and higher food inflation, elevated / sticky total/core service inflation and also goods inflation. Also, oil may be finding a base around $70 amid OPEC jawboning/voluntary production cuts and increasing Chinese demand; may soon sustain and trade above $80.

On 31st May, MOSPI flash data shows India’s real GDP (at constant prices) was around Rs.43.62T in Q4FY23 vs 40.23T sequentially (+8.43%) and 41.12T yearly (+6.08%). The Indian economy grew around +6.1% in Q4FY23 (y/y) against +4.5% sequentially and above the market forecast of +5.0%. For FY23, India’s real GDP was around Rs.160.07T against 149.26 in FY22 (+7.25%) and 136.88T in FY21 (+9.04%); i.e. the Indian economy grew by around +7.2% in FY23 against +9.1% in FY22. At the present run rate, the Indian real GDP may grow by around +6.0% in FY24 to reach Rs.169.67T (~170T). As per the trend, the Q1FY24 real GDP may contract by around -10% in Q1FY24 sequentially to Rs.39.26T against Q1FY23 Rs.37.44T; i.e. an annual growth of around +4.86%.

On the expenditure side, in Q4FY23, the expansion was mainly boosted by private consumption (consumer spending), services exports, and manufacturing amid easing input cost pressures. Also, services have emerged as a major driver, comprising more than half of GDP. Private spending rose at a faster 2.8% (vs 2.2% in Q4 2022), public expenditure rebounded (2.3% vs -0.6%), GFCF (Gross Fixed Capital Formation) rose faster (8.9% vs 8%), stocks recovered (5.9% vs -0.1%), and exports (11.9% vs 11.1%) increased way more than imports (4.9% vs 10.7%). Overall, Government spending, especially in transport and social infra along with upbeat service/IT export boosted Indian GDP in FY23.

On the production (GVA) side, the manufacturing sector grew for the first time in three quarters (4.5% vs -1.4%) and faster increases were recorded for the farm sector (5.5% vs 4.7%), construction (10.4% vs 8.3%), financial and real estate (7.1% vs 5.7%), and public administration (3.1% vs 2%).

But going ahead, India also has to bring proper political reform, especially on the political funding aspect, proper policy for population control, and more targeted infra stimulus (transport-specially railways and social infra-especially quality medicare and education). Thus the scope for future improvement in GDP and GDP/Capita is immense. This, along with a deluge of quality companies, good business models, growing deleveraging, and impeccable/credible management, the Indian stock market may outperform not only its peers (EMs) but also many DMs. The Indian economy has to grow +8% in real terms (if not +10% potential) over the next 10/15 years, keeping core inflation stable around 4/5% so that Nifty EPS/Corporate earnings should also grow 15-20% CAGR on an average. India’s huge and growing population is itself a ‘virtual guarantor’ for +5.00% real GDP growth and +5.00% core inflation.

The next move of Nifty will depend upon RBI/Fed rate action along with earnings trajectory:

As highly expected Fed goes for a +25 bps hike on 26th July with a less hawkish stance; the Fed repo rate is now at +5.50%, the highest in 22 years. Overall, the U.S. labor market and core inflation trajectory are still hot enough for another Fed hike. Fed never surprised the market with its rate action and by mid-October (after core inflation and labor/wage data for July-September); it will be clear whether Fed will go for another +25 bps hike in 2023 before going for a final pause in 2024. In any way, Fed is now preparing the market for another hike and then a possible end of the tightening cycle by Dec’23.

Fed may go for a pause in September after the 26th July hike, but may hike another +25 bps on 2nd November, if core inflation does not fall significantly. Fed may go for a long pause to assess the underlying core inflation trend and outlook along with the labor market for July-Sep’23 economic data. Fed may project at least another hike in 2023 in its September dot-plots (SEP) depending upon the actual economic data and outlook. If there is no significant easing of core inflation, especially core service inflation, then Fed may go for another +25 bps hike in Nov’23 and possibly the end of a tightening cycle.

Fed goes for a less hawkish hike on 26th July; Fed may go for a long pause, at least till 1st November’23, to assess the underlying core inflation trend and outlook along with the labor market for July-September’23 economic data. If core CPI inflation indeed eased further to around +4.0% by Oct’23, then Fed may refrain from any further rate hike in 2023 and may also indicate some rate cuts in Q2CY24 in the Dec’23 SEP (ahead of the US Presidential Election in Nov’24) to keep real repo rate around +1.00% levels. If Fed indeed goes for a pause/pivot after Nov-Dec’23 and prepares the market gradually for any rate cuts from mid-2024 itself, U.S./global bond yields (borrowing costs) will slump, which will be positive for Wall Street/Dalal Street.

Conclusion:

Overall, RBI is quite optimistic about India’s GDP growth but is still concerned about elevated sticky core inflation. RBI is also quite optimistic about maintaining India’s price, financial, and growth stability through its calibrated policy action. As India’s core CPI is still substantially higher than targets, while real GDP growth is almost in line with the potential trend, RBI is still open for another one +25 bps rate hike. If Fed indeed goes for another two rate hikes in H2CY23 for a repo rate of +5.75%, RBI may go for at least another +25 bps rate hike by Dec’23 for a corresponding repo rate of +6.75%. But, if Fed goes for only another rate hike in H2CY23 for a terminal repo rate of +5.50%, RBI may continue to hold at +6.50% in FY24.

In any way, on 10th August, RBI may again go for a hawkish hold stance.

Apart from Fed rate action, Nifty may also be influenced by the Q1 earnings report and inflation data. India’s core inflation may jump and stay elevated and sticky due to underlying structural issues like higher logistic costs and adverse weather conditions, which pushed food inflation substantially higher in the last few weeks. If Fed goes for a pause in H1CY24 and some cuts in H2CY24, then RBI may also follow and may go for a 50 bps cut in Apr’24, just ahead of the May’24 general election. RBI may like to ensure at least +50 bps real interest concerning core CPI; if core CPI indeed stabilizes around +5.00% in early 2024, then RBI may keep the repo rate at 5.50% in FY24 and go for another 50 bps cut in H2FY24.

Technical Analysis: Nifty Future (LTP: 19836)-EOD: 31/07/23

Looking ahead, whatever may be the narrative, technically, Nifty Future now has to sustain over 19950 for a further rebound to 20050/20100*-20250*/20375 and 20650/21050-21550/21650 in the coming days (Bullish case scenario). On the flip side, sustaining below 19000 Nifty future may again fall to 19700/550*-19430/19230 and further to 19090/18995*-18880/18595* and further 18350/18150*-17775/17650 in the coming days (Bearish case scenario).

NIFTY FUT

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