Latest Indian Share Market Updates & News in May 2022

Is Nifty still expensive?

The markets have remained erratic this week in the absence of a significant mood event, with a furious struggle raging between bulls and bears. Indian benchmark indices have corrected 14-15% from all-time highs and consequently, the trailing P/E of NIFTY50 has fallen below 20x levels, reasonably lower than its 10-year average trailing P/E of about 22.45x. While this average may not be directly comparable as NSE changed its methodology for calculating Nifty P/E last year, the current trailing P/E certainly is now not in the expensive zone. When we calculate the drop in Nifty’s trailing P/E during periods of major corrections over the last 12 years, the average drop has been 27.7%. Currently, the drop from October’s high is at over 29%. So even considering this data point, it seems that the valuations have mellowed down and are now starting to look attractive.

Having said the above, India’s valuations relative to other emerging markets still are at a considerable premium. In fact, if we look at the valuations of broad emerging markets as well as developed markets except US, they are almost nearing pandemic lows. However, India has been quite resilient and our current P/E is also quite higher as compared to pandemic lows. There is no doubt that the premium given to India is on account of the structural story, which despite all the macro hurdles, still appears to be strong. India’s earning trajectory has not yet completely de-railed and the fact that India is going to be the fastest-growing economy in 2022 speaks volumes about the Indian fundamental story. So while considering the global macros a strong positive catalyst maybe need to put a pause to this correction phase, the current valuations do provide a good point to start building a strong long-term portfolio. A bottom-up approach and overweighting the large caps should be the go-to strategy.

Event of the week

In order to control the rising inflation, the government announced an increase in the export and import duties of the commodities including steel and iron ore last weekend leading to Nifty Metal declining by 8.14% in a single day. This will act as a double whammy for the steel majors as on one hand, the hike in export duties makes their products incompetent in the global markets while on the other hand, they will need to even reduce domestic prices to dump the excessive supply. Consequently, the top line, as well as the bottom line of these companies, will be dented. It is highly likely that the government may come up with more such measures to curb inflation. Even sugar stocks witnessed a similar drop when a restriction on sugar exports was announced this week. Considering the uncertainties and that these sectors are highly cyclical in nature, it’s best to avoid these at the moment.

Technical Outlook

Nifty 50 index closed mildly positive this week. The index continues to trade range bound and seems oversold in the short term. Major developed and emerging market indices are exhibiting immediate term bottoming formations as well. Further, a bullish reversal is quite evident in the banking index which has been outperforming the benchmark after bouncing from the rising channel support. Considering these indications, the downside in Nifty seems limited up to 15,700. A decisive break above 16,400 can trigger a retest of 16,800-16,900 levels. Traders are therefore advised to maintain a bullish bias with a strict stop loss below 15,700 levels.

Expectations for the week

Market movement globally will be influenced by manufacturing PMI figures for China and the consumer confidence index of the USA. Back home, amid global recessionary fears, data on Indian GDP growth for Q4 FY22 is highly awaited. Owning to commodity price spikes, the decline in wheat yields, and still some pressure on contact intensive services, it is widely expected that the GDP growth may be below its previous quarter. However, if growth falls short of projections, existing emotions may worsen. Apart from the GDP print, auto companies will also be in focus as they release their monthly sales numbers. Considering these host data releases, the coming will definitely be action-packed and investors are advised to maintain prudence with their trading picks. Nifty 50 closed the week at 16,352.45, up by 0.53%.

9 Lessons from Nifty 50’s journey!

Markets continued swinging wildly this week with a mild positive bias. The market’s volatility in last 6 months or so has made a lot of retail investors wary of making investments. At this stage it becomes important to recognize that in spite of changing economic dynamics, global shocks, structural changes, Nifty has given a CAGR return of ~11% in ~27 years or an absolute return of 1700%. So a study of Nifty's journey from 1000 to 17000+ brings about some key insights, which are briefly laid down below:

Strike Rate is Overrated: The NIFTY has been right only 55% of the times and despite that delivered a handsome 11.31% CAGR. Hence, there's no need to be right all the time. Half the time is good enough. Let your winners run: NIFTY's average winning position is +1500% and average losing position is -45%. A position in profit is proof that you were right. Let it run without the urge of constant profit-booking. Not only ride, let your winner’s age: NIFTY's average winning position is held for an average of 12.5 years and the average losing position is held for about ~ 4 years. Give your winners more time. Don't need to be hyper-active to make money: In its long and continuing lifespan the NIFTY has undergone only ~150 trades with an average of 4 stock rejigs in a year. Despite such a low churn, it has managed to deliver a 11%+ CAGR return. Churn only if required. For a stock to be a 100-bagger it needs to be a 10-bagger first - NIFTY only buys proven winners. It doesn’t predict winners but instead waits for actual winners to emerge and in many cases ends up buying after a stock would be up many-fold. Better to buy winners than predict. All you need is just 3-5 ideas in a lifetime - ONLY 3 stocks have contributed to more than half of Nifty 50’s absolute returns in 27 years - HDFC Bank, Infosys and Reliance No need to constantly hunt for ideas. An individual investor could cut losers even faster - Despite a clearly large losing position, the NIFTY waits for a stock to fall below to its lowest rank to exit. An Individual has many advantages vis-a-vis an Index or Fund Manager. It’s better to buy high and sell higher than merely buying low and selling high - NIFTY makes most of its entries at All Time Highs without worrying about being late and yet manages a handsome 11% CAGR. Investor’s job is to make money - Not buy at lowest possible price. Pick a style/method of investing and stick to it - NIFTY's style is Bhav Bhagwan. It does not evaluate the financials, does not meet managements, and does not know the business the company operates. Despite this it manages to make money.

So investors can apply these lessons to their investing journeys and hopefully generate good returns along the way. Link for a detailed understanding of each of the insights: https://www.samcomf.com/knowledge-center/food-for-thought-may-2022-9-lessons-from-nifty50-journey/

Technical Outlook

Nifty 50 closed positive this week and both the benchmark index as well as Bank Nifty bounced back from the lows formed last week. Despite the bounce, we believe the market has not completely bottomed out, as the price patterns on Nifty reflect that the up-trend has been severely damaged. Even if we look at the weekly chart of S&P 500 index, a Head and Shoulder breakdown has been witnessed. Having said this, a short term bounce cannot be ruled out. Whether the bounce will unfold as a relief rally or the start of a new bullish move is not evident as of now. So considering all these factors, going into the next week we suggest traders maintain a cautiously bullish outlook as long as Nifty does not break below 15,700 levels.

Expectations for the week

Given a slew of key economic data releases, the current earnings season, and the monthly expiry, the volatility seen this week is anticipated to persist. The FOMC minutes, the GDP growth rate estimates of the USA and the initial jobless claims will drive the global market sentiments. Back home, the data on India’s Foreign Exchange Reserves that was in the news for dropping to a one-year low and the INR/USD movement will be closely tracked. Markets will remain choppy and investors are advised to stay on the sidelines till a clear direction emerges in the market. Nifty 50 closed the week at 16,266.15, up by 3.067%.

Have markets bottomed out?

The carnage in the global markets intensified during the week and bears have completely gripped D-Street as well. Nifty has corrected over 15% from its all-time high and with a motive of bottom fishing, investors are wondering whether are we nearing the bottom or are markets set to get worse?

Usually, when the market bottom is in sight, the sentiment is extremely pessimistic, with fear at its peak. It is a phase where investors are highly skeptical of pouring fresh funds into the market. Such scenarios are also marked by periods where markets decline on lower volumes and rise on higher volumes. However, currently, the consensus is still to buy the dip to ride the next rally indicating that greed is still alive. Further, volumes on lows are far from drying up. Also, if we look at the data in the past twenty years, apart from the event-based market crashes of 2008 and 2020, other corrections have had average drawdown levels of close to 25% in Nifty Basis these historical precedences, there is still room for markets to fall. Additionally, S&P 500 has fallen more from its all-time high than the Nifty The fact that Indian markets have fallen higher than S&P 500 in every major market fall also suggests that the bottom is still far.

If markets are to reverse strongly, key triggers will be needed which in the current context could be the quick easing of inflation and a pause on the aggressiveness of interest rate hikes. Currently, there are no visible signs of such turning points. Therefore, it is unlikely that the markets are bottoming out. However, even if markets do rebound, there are strong resistance levels that will be difficult to breach, thereby, increasing the possibility of another relief rally. Therefore investors should be extremely cautious and not interpret a relief rally as the end of this correction phase.

Event of the Week

During the week the spotlight was on India’s retail inflation which came in at 7.79% to an 8-year high substantially jumping from the previous month’s number of 6.95%. The RBI has projected Q1FY23 inflation at 6.3% which is clearly now subject to modification in the upcoming June MPC meet. Given this inflation trajectory, our repo rate has a lot of catching up to do. RBI has already hiked repo rates by 40 bps in a surprise announcement and also indicated that they intend to get the repo rate back to pre-covid levels. This signals that another hike of about 75 bps is already on cards. Further, other major central banks, including the Fed, have signaled cumulative rate hikes of about 2%-2.5%. So for parity, our repo needs to be somewhere between 6%-6.5%, thus requiring additional rate hikes of about 150-200 bps over the next 12 to 18 months. Therefore, for the June meeting, it is likely that the repo will be hiked by another 25 bps at the minimum.

Technical Outlook

Nifty 50 index closed strongly negative for the week and Indian as well as major global indices have become oversold in the short term. Nifty is currently trading around a strong support zone of 15,700, which is the lower end of the downward sloping channel. The BankNifty ndex is also trading around the rising trend line support drawn from the March 2020 low. Therefore, an immediate bounce in Nifty and BankNifty cannot be ruled out. Extremely aggressive traders may initiate long positions while maintaining a strict stop loss just below 15,700. The immediate resistance is now placed at 16,600.

Expectations for the week

As the result season nears its last leg, D-Street will focus on global cues to determine its direction. In India, WPI figures are expected to be released and the most awaited IPO, LIC will be listed on the bourses. Given the current market scenario, it is likely that LIC gets listed at a discount or close to its upper band. Further, if there are no positive catalysts next week, indices are projected to stay under pressure as markets have adopted a 'Sell on Rise' mentality. Investors are advised to stay on the sidelines, as in such difficult times it is better to wait out the storm rather than go bottom fishing. Nifty 50 closed the week at 15,782.15, down 3.83%.

Is Gold losing its sheen?

Bears tightened their grip this week and Nifty decisively broke below the crucial support levels. On the contrary, gold has been recovering from a corrective phase. Interestingly, the returns gold has delivered since it began trading on the MCX till February 2020, i.e. just prior to the pandemic, are roughly in line with Nifty. While there has been some variation in returns during specific event occurrences, the long-term returns have been similar – around 603% for Nifty whereas 620% for gold. However, as gold has been underperforming since past year and a half, the return differential has widened sharply and is at about 174% as of April end. If the theory does hold good, then from where we stand now the odds are stacked in favour of gold catching up.

But can gold really rally from here? Historical precedence suggests that gold has, on an average, given double-digit returns in the year following the crisis. Thus, since Russia-Ukraine war is persisting, gold can continue to find price support. Further, the metal is touted to be a classic inflation hedge and as per the World Gold Council, a 1% increase in inflation translates into a 2.6% rise in the metal’s demand. Lastly, since few years now, Russia has been shifting part of its reserves to gold. There is also a belief that China will follow suit. Also, post the Russia-Ukraine conflict, there is an increasing motive to peg reserves to gold, as these reserves cannot be sanctioned. If countries start pegging reserves to gold, it can increase the demand of gold substantially and trigger a strong upside. The only downside risk is that of rising interest rates, as gold has an inverse relationship with it. However, considering that gold prices did not fall despite RBI’s and Fed’s rate hike this week, this risk also to an extent seems priced in. So while gold may have lost its sheen since some time, it seems set to glitter now. Investors are therefore advised to check their portfolio allocation to gold and initiate building up at least a 5%-10% exposure.

Event of the Week

In the midst of global chaos and conflicts, if there is one thing that is uniting the countries, it is inflationary pressures and following interest rate hikes. This week central banks of various countries have resorted to an increase in benchmark interest rates. To begin with, in a surprise announcement, the RBI increased the repo rate and cash reserve ratio by 40bps & 50bps respectively, thus, putting concerns of the bank being behind the curve to rest. Soon after, the US Fed raised its benchmark interest rate by half a percentage point, the biggest jump in 22 years. Further, Bank of England, citing looming recession risk, raised its interest rate to the highest level in 13 years. Fears that these rate hikes will not be enough to tame soaring inflation have begun clouding our markets. Amid sky rocketing inflation and increasing global uncertainties, gold appears to be one of the best assets to park funds as these concerns are expected to support gold demand strongly.

Technical Outlook

While the major trend in gold is bullish, the metal has been correcting lately due to the steep rally in the Dollar index. The Dollar index is negatively correlated with gold and the index is currently trading in overbought zones around multi-year resistance levels of 103-104. It is likely that the dollar index reverses from here. Should the reversal materialise, gold can resume its upward move. Strong support zones of gold have also formed around 50,500 to 50,000 levels. So a successful retest of these levels can lead to a bounce-back in the metal.

Expectations for the week

Given a spate of major economic data releases, the current earnings season and multiple IPOs opening for subscription, the volatility experienced this week is expected to continue. Inflation figures for the United States and China will determine market movements globally. Data on India Industrial numbers, domestic inflation rates and manufacturing production will keep Indian markets on their feet. Following RBI’s unexpected interest rate hikes, it is widely expected that Indian inflation will be around the 7.5% mark, substantially higher than the central bank’s tolerance limit. However, an inflation print higher than expectations can further sour current sentiment. Nifty 50 closed the week at 16,411.25, down by 4.04%.