Flows Vs Fundamentals – Probability of Nifty hitting 8000 or 10000?
There has been a debate in the recent past on what is driving the stock markets i.e. flows or fundamentals. In the last two months, most of the global market recovery has been driven by flows from central banks and not on fundamentals.
Here are some facts to reflect upon:
Flows:
1. There is a report by Congressional Research Center (CRS) which says foreign investors have withdrawn $26 Bn from Asian economies of which $16 Bn has been pulled out from India during the coronavirus crisis (only silver lining has been significant investments flowing into Reliance). One of the factors for withdrawal by foreign funds is the likely weakening of emerging market currencies.
2. The value of trades is consistently moving up in Indian stock markets during the crisis as shared in the chart below. While foreign funds are sellers, but domestic institutions/retail investors are buyers. Based on the limited interactions it seems to me that flows from retail have slowed down in the month of May.
3. The new accounts opened increased by 50% on CDSL i.e. from 400k a month between April 2019 – Feb 2020 to 600K during March and April 2020. A sharp spike was also observed by Zerodha and 5paisa.com, most of the new accounts have been opened by first-time investors, some of whom are in Tier III and beyond cities. This is good news for stock markets.
Fundamentals:
1. The economic fundamentals may have further weakened with COVID crisis.
2. The liquidity crisis continues as not enough credit transmission is happening to the affected sectors despite enough liquidity support and credit guarantees being offered by the government. Banks are unwilling to take risks and almost 8 Trillion Rupees are parked in the reverse repo.
3. Earnings growth continues to be below expectations for the last few years.
4. GDP may contract based on different estimates being provided by various agencies. While one should not extrapolate the future based on the present crisis but in my personal view, the contraction could be of the order of at least 10-15% (I hope I am wrong). The estimate is based on a likely contraction of just 20% in manufacturing, no drop in agriculture, and just a 10% drop in the services sector. The contraction can be lower if liquidity flows to the credit-starved sectors (including NBFCs), and government initiatives which can create demand by putting in more money in the hands of buyers.
In conclusion, based on the above facts it seems to me that the probability of Nifty moving lower is relatively higher, but the markets have a tendency to give positive surprises. In such an uncertain environment, it is a good idea to diversify, stay liquid, and hedge positions wherever possible.
Markets can move up in anticipation if they see speedy execution of government initiatives of self-reliant India, improvement in consumer and investor sentiments, increase in risk appetite, free flow of credit, and reversal of investment flow by foreigners into the Indian markets. While it may seem a tough task but not impossible.
Being an optimist and having worked with founders of start-ups, they are still very bullish about their business by investing time in increasing the runway and exploring new avenues of growth despite being undercapitalized and some of them having only marginal revenues. This fraternity of start-up founders is extremely driven and have a will to succeed.
Disclaimer: Please take your own informed decision and not in any way rely on the thoughts shared above
20 May 2020
