India and Global Markets – Where is it heading?

Are we heading into a bearish market?

This is one of the frequent questions which I get from many of our students…. Thought will try to provide my view of the market situation.

Let us start at a macro level to begin with. Looking at the global economy and mostly US, its pretty clear that the situation is not positive due to:

• Current very high inflation and raising – 7.5% two months ago and now beyond 8.5% is unseen in the US in over multiple decades. Some of the reports are indicating worst is yet to begin and are suggesting inflation levels beyond 12% to 15%.
• Internally manufacturing sector is yet to figure out how to come back given most of it is in China for the last two plus decades. This has led an entire generation of people with no relevant skill to be employed in this sector.
• Increasing of interest rates by FED looks like is not going to stop soon. This is the only tool which they seem to be having to fight the inflation and they are going to press on it to the floor. Jerome Powell mentioned the existence of real risk of inflation increasing and FED going to increase the interest rates further.
• Major tech stocks in the US markets have already seen more than 30% downside from their recent highs in Nov and Dec of 2021 inspite of fundamentally doing all the right things. The recent quarter results have only added to this downside.
• S&P and Dow Jones index has already seen 15% and 10% fall in the last five months.
• US Major Tech Stocks over last few weeks
  All of these are suggesting that US Economy is not in good shape and the US government this time is not interested in protecting the markets but rather allow it to correct and correct faster.

Now, coming to India, we clearly are on a trajectory for a Five Trillion economy and the policies are mostly inline to make this happen. This is also getting reflected in tax collection that has reached all time high. Not a single case of political scam in the last eight years. India seems to be getting stronger with all the internal consumption, re-invention of financial sectors, increasing business growth at all levels – small & medium & large businesses and clean governance.

A quick glance at the fundamentals of Indian corporates especially the heavy weights – stellar performance for the financial year 2021-22, meeting or exceeding market expectation and good projection into next financial year – Reliance, ICICI Bank, HDFC Twins and many more in this list.

All of this is a clear divergence from the US economy and US Markets. This will mostly have an impact on India markets which is now being witnessed in the last few months.

While many individual stocks hit all time high in Jan and Feb, Nifty did not during the same time. This was also noticed within sectors. PSU Banks was hitting all time high in Jan/Feb time but that was not witnessed in both Bank Nifty and Nifty; Metals and Energy hit all time high, but the same behaviour not witnessed in Nifty; we are witnessing similar divergences between Nifty and scrips like Reliance, ICIC Bank, TCS, Asian Paints to name a few.

Divergence between Nifty and Heavy Weight Scrips
Now, looking at oil prices post the Russia and Ukraine war it’s not as good as we would have wanted. Increasing oil prices will lead to increasing inflation rates. There is a possibility that RBI and the government take steps to curb the inflation in short to medium term by increase the interest rates. This again will only put additional pressure on the markets leading it to the downside. This for me is not a major problem because we have been in this situation many times and know how to manage this. Our internal consumptions are good enough to sustain the buying power in-spite of mild increase of inflation.

Finally, FII selling in the last six months has been the highest at Rupees 230 lakh crore. This could mean that FIIs are either re-balancing their portfolio or shifting their money back to US. Ultimately this is not a good sign for Indian markets.

While all the economic aspects are good in India, the impact of US’s down run seems to be making a dent to Indian markets as well. People’s sentiment is also adding to all of this.

Collectively understanding all of this leads to my conclusion as following:

US seems to have entered a bear market
India is economically and fundamentally correct and strong
Indian markets are going to be reacting to the US markets which could lead to a correction in the short to medium term which has already started.

At this stage one must look at his and her personal portfolio, make an informed decision for each scrip individually. Fundamentally and technically if individual scrips are performing well, those can be held provided one has a long-term view. In shorter term the possibility of downside seems to be having a higher probability.

Traders will be better placed if they are following a strategy. Trend Traders will always be in an advantageous position if they stick system based trading.

Cheers,

Jitendra B Gopalakrishna (Jeethu)