These are tough times. Markets are volatile, sentiment is weak. Bond yields have been rather volatile
in the last few days...
Currency and liquidity
 Over the next two months or so, the rupee may continue to weaken, but not at the pace that we are...
Don’t get overwhelmed by the short term bearish views
 In fact, if one has liquidity handy, it may be a great opportunity...
Source: Internal. The views expressed are as of August 23, 2013 and may change as subsequent conditions vary. Investors
ar...
of 4

Naganath market outlook

S. Naganath’s views on the current market scenario (as on August 23, 2013)
Published on: Mar 3, 2016
Published in: Business      Economy & Finance      
Source: www.slideshare.net


Transcripts - Naganath market outlook

  • 1. These are tough times. Markets are volatile, sentiment is weak. Bond yields have been rather volatile in the last few days. The rupee has been facing a fair bit of weakness. India’s current account deficit is a matter of concern along with the fiscal deficit. Equity markets have seen a significant correction already. Investors are looking to make sense of such market conditions to figure out what they can do, both over the short term and also over a longer term. Let’s endeavor to ascertain what the likely trend will be for equities and fixed income over the short and long term.  It’s going to be somewhat tough for many markets across the world that benefited from the flow of easy liquidity. That is one reason why we are seeing corrections in equities, currencies and bond markets, including in India.  One must expect the volatility in global markets, seen since the end of May, to persist. It will affect emerging market currencies, bonds and stocks at least for the next month or two. In fact, more volatility can be expected across the world as the Fed prepares to discuss the time table for QE (Quantitative Easing) tapering.  A series of macroeconomic data will come out of the US in September, and one of the most important events to focus on would be the Sep 17th-18th meeting which would likely announce a timeline for the QE taper and potentially provide some perspective on the trajectory for short term interest rates as we get into 2015-16, although that is some time away.  We need to be watchful of statements coming out from the Fed. If they tend to be very hawkish, then within the next couple of months, o Expect more downside in equities globally o US bond yields may go well past 3 per cent o Dollar may strengthen o Emerging market currencies may weaken WHAT MAY HAPPEN GLOBALLY? S. Naganath’s Views on the Current Market Scenario
  • 2. Currency and liquidity  Over the next two months or so, the rupee may continue to weaken, but not at the pace that we are seeing. We have already seen it touch 65. Many people had expected this to happen by the year-end, but it has happened within days. We may not see too much downside from here, and therefore expect the rupee to not weaken beyond 65 or 66, over the next two months.  On the interest rate scenario, the regime of tight liquidity and higher interest rates is not expected to reverse anytime soon. So, a rate cut or easier money conditions may not happen, at least for the next couple of months.  Money market condition will continue to remain tight; in fact it may even get tighter. We do not expect short rates to come off. If anything, they would probably move up a little more. In the next month or two, we should see 10 year bond yields getting back closer to 9%, maybe even higher. So one should be prepared for higher long term rates and for short term rates remaining elevated. Based on that, one needs to take a call on investment in duration funds. Growth estimates  Analysts have reduced their growth estimates. We started the year with GDP estimates at 6 per cent growth rate. That estimate is already down to 5 per cent, and quite soon it may get downgraded to 4 ½ per cent or so. As a result, earnings growth estimates for large cap companies are also lower than what they were at the beginning of the year.  Corporate earnings growth expectations at the beginning of the year were around 13-15%. This expectation has now reduced to about 7-8% with some expecting it to be even lower. If that is the case, then clearly the market, which is trading at 13x – 14x one year forward P/E is a little on the expensive side and one should be prepared for further selling by FIIs as they evaluate growth prospects for FY14.  The markets may fall further by 7-10% from here in the next two months or so in response to lower growth expectations. WHAT CAN ONE EXPECT IN INDIA? S. Naganath’s Views on the Current Market Scenario
  • 3. Don’t get overwhelmed by the short term bearish views  In fact, if one has liquidity handy, it may be a great opportunity to buy with a one to two year time frame. If the Nifty were to go to 5000 or 4500 (levels we last saw in the fourth quarter of 2011), these would be fantastic levels to buy simply because by the time we get to the middle of next year, one major event, the elections, will be behind us.  As we get into the new financial year, once the elections are concluded and expectations of growth resume, many things can reverse in a hurry. The currency can start appreciating, rates can come off quickly, growth expectations can go from 4 ½ to 6 % and earnings growth, more importantly, can go from 5-7%, back to 15-20 %. All of that can cause a re-rating in terms of the P/E multiple.  By the middle of 2014, if the US economic growth is not seen to be strong as is currently the case, we could either have a revival of QE or a reduction of tapering. We must remember that QE taper will occur only if the economy is consistently growing and unemployment declining. But if the economy is again soft in terms of growth expectations, the tapering will stop and in fact we may even see more QE. That possibility still exists. If that were to happen, then you would again see a world-wide rally in equities and emerging markets including in India.  When sentiment turns and growth expectations are upgraded, we often notice a dramatic improvement in prices. If one looks at the period in the aftermath of the financial crisis (March 2009 to September 2009), our markets nearly doubled. It was not as if the crisis had ended and everything was fine. We were just coming out of the shadows of the financial crisis of 2008. Yet, the measures taken thereafter in terms of getting the economy back on track contributed to a dramatic improvement in sentiment and prices. Don’t miss the inflection point  It’s alright to be negative based on data, but at the same time one must not get too negative or we may tend to miss the inflection point. When the inflection point comes, the upward move is very swift and if we miss it, we have to wait a long time before we get another similar opportunity.  Anybody who missed the move from March 2009 to September 2009 would have found that since then the markets have pretty much been in a consolidation mode. It was not until the third quarter of 2011 when there was a market correction, that one got another opportunity to buy equities at an attractive valuation level. WHAT SHOULD INVESTORS DO? S. Naganath’s Views on the Current Market Scenario
  • 4. Source: Internal. The views expressed are as of August 23, 2013 and may change as subsequent conditions vary. Investors are advised to consult their own legal, tax and financial advisors to determine possible tax, legal and other financial implication on their investment decision.  While times will be tough for another month or two, or maybe even till the end of the year, there will come a fantastic buying opportunity in the next couple of months.  If investors are able to buy at current levels or better still, invest at levels 10% or so lower from here, they should take advantage of the opportunity and then remain invested for at least a year.  One year from now, the economic outlook is expected to be much better than what it is today and the same is also applicable as far as bonds are concerned. It will be tough going for another two or three months as market liquidity is tight. Bond yields may rise, and if they move higher than where they are, then I think one can consider buying income funds or dynamic funds and then remain invested for 6 months to a year. However, while the increase in yields will provide a good buying opportunity now, they will come off by the middle of next year or the second half of next year, in our opinion.  If the choice is to invest in either bonds or equities, then, there seems to be relatively greater upside potential in equities, in our opinion. THE BOTTOM LINE Mutual Fund investments are subject to market risks, read all scheme related documents carefully. S. Naganath’s Views on the Current Market Scenario

Related Documents