‘International factors are a bigger risk to equity markets’

‘Higher than expected inflation in the US or the European Union, faster than expected tightening by the major central banks, break out of a war in Europe, and withdrawal of portfolio equities from the emerging markets are factors which can result in equity market corrections.’

“The Indian equity market continues to look attractive from the medium to longer term perspective. The fundamentals, both macroeconomic and corporate, look healthy,” Anand Rathi, chairman of the Anand Rathi Group, tells Prasanna D Zore/Rediff.com. The first of a two-part interview:

The markets have been quite rewarding for investors post the Black Swan event of COVID-19. After hitting all-time highs in October 2021, the market seems to have lost momentum and moved into a consolidation phase.
How long will this consolidation last?
What triggers could give a new direction to the markets either up or down from here?

Despite considerable volatility and large variance in yearly returns, Nifty 50 has generated positive return for 6 successive calendar years between 2016 and 2021.

In view of significant returns during 2021, the consolidation phase since October 2021 is not only expected, but also welcome for the long term sustainability of a bull run in the Indian equity market.

We believe that timing the equity market on a consistent basis is not possible. Consequently, it is difficult to say for how long the current consolidation phase in the equity market will last or whether the market will take an upward or downward trajectory in the near term.

Yet, I feel that the Indian equity market continues to look attractive from the medium to longer term perspective. The fundamentals, both macroeconomic and corporate, look healthy.

With the increasing allocation of Indian households in equity assets, the liquidity for the secondary equity market is also likely to remain healthy.

Nifty 50 is currently trading at trailing price to earnings ratio of 24-25, which although not cheap, is not expensive either.

While the near term corporate earnings outlook, modalities to manage the large planned government borrowing indicated in the recent Union Budget, and the likely start of monetary tightening and liquidity withdrawal by the Reserve Bank of India are some of the concerns for the Indian equity market, the main challenge relates to the international environment.

The pace of policy tightening by the Federal Reserve in the US, the outlook for global growth, possibility of war in Europe are issues which are weighing on the equity markets globally.

Moreover, there are uncertainties about cross border portfolio capital flows. These factors are keeping the equity markets on the tenterhook and no definite direction is visible in the near term.

Like other equity markets, these factors are also impacting the Indian equity market.

Higher than expected inflation in the US or the European Union, faster than expected tightening by the major central banks, break out of a war in Europe, and withdrawal of portfolio equities from the emerging markets are factors which can result in equity market corrections.

At the same time, lower than expected inflation and more dovish commentary by the central banks on the future outlook of monetary policy, de-escalation of tensions between Russia and Ukraine, fall in crude oil prices, further easing of supply chain constrains are factors which can result in bounce back in the equity market.

The markets did react positively to the Union Budget announcements, but the post-Budget rally has fizzled out and now the Nifty is trading below the Budget-day low.
How do you think the rest of the year will pan out for equity investors?

Over the years, the importance of the Union Budget has come down significantly. The Budget is no longer the forum for long term policy announcement by the central government.

Moreover, with the introduction of GST, most indirect taxes apart from customs duty are outside the purview of the Union Budget. Because of these reasons the impact of Union Budget on equity market has come down significantly.

At the same time, we observed that the Union Budget this time has been a continuation of the measures initiated by the government to boost India’s growth by accelerating investment. In that sense the Union Budget is just a continuation of the measures which are being initiated by the government over the last two and half years.

Two things about the Union Budget exerted positive influence on the equity market.

First, rather than starting considerable fiscal consolidation, the Budget focused on boosting growth.

Second, the Union Budget has put lot of emphasis to accelerate public capex.

At the same time, large fiscal deficit and market borrowing plan of the government suggest that yields in the bond market may go up, which is negative for the equity market as it increases the discount rate on future corporate earnings and thereby reduces the present value of future corporate earnings.

As I said earlier, rather than domestic factors, international factors are a bigger risk to the global as well as Indian equity markets. Therefore, the recent volatility of the equity market can be traced to international risk factors rather than concerns about the domestic economy or the corporate sector.

Also the earnings season for the quarter ending December 2021 is going on and during the results season, generally the market remains choppy.

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