Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Understanding Indian Equity Market – At Sweet Spot

espite the major BRIC (Brazil , Russia , India, China) country are facing challenges , Indian market has outperformed its peer by a huge margin. Generally, it is believed that, after its national election, India is going to have a strong Government with focus on governance and growth. We strongly feel that the Indian market is sweetly placed both in terms of Fundamental & technical perspective. One has to understand that market is a lead indicator, rational and understand only "Future earnings". With this, now let's look at the Indian market purely from a rational perspective (without so called Modi Wave).

Technical

First of all, would like to clarify that I believe the bull run, which was started in 2003 , is still intact on quarterly chart. We feel that after 5 years of rally (2003-2008), the market was in consolidation for 5 years and given breakout in the year 2014. The correction was overdue (after 2008) after the first five year of rally. So, now, the market has broken out after the consolidation rage for five years.

  • Nifty (Indian benchmark Indices) was on the cusp of a major breakout at around 6338. After making a top of 6357 in 2008, Nifty plunged all the way to 2252 in October 2008. From there it rebounded back to 6338 in November 2010, made a double top and fell to 4531 in December 2011. The benchmark has crossed this successful & we feel that this is the major breakout after a long-long consolidation of nearly six years. This in turn would project major up move over the next couple of years. The triangle formed by 6338-4531 range projects a immediate target of about 8150, which can materialize over one and half to two years

.

  • Moving forward, if one takes the triangle formed by 6357-2252 range, the target comes to about 10460, which can materialize over next 3-4 years. On the way down, trend line adjoining two major bottoms, viz. 920 in 2003 and 2252 in 2008, presents a solid support around 5100.
  • We tried to represent this 8 year cycle of Indian Market. Generally it follows this pattern & every 8 years market makes new highs. According to this cycle, the market might make new high in the year 2016. (This is not rational study). Hope you know in the year 1992 . 2000, 2008 market was at the highest level.
8 year cycle in Indian Market
Consolidation Consolidation consolidation New rally Bull market Bull market Bull market Market Pick
              1992
1993 1994 1995 1996 1997 1998 1999 2000
2001 2002 2003 2004 2005 2006 2007 2008
2009 2010 2011 2012 2013 2014 2015 2016
Click to enlarge

Few Fundamental drivers

Though, I am not a fundamental specialist, however, several factors now impacting the market. We tried to put little fundamental perspective on the Indian market to global investor, which may be helpful.

  • Market is at a new high, but the valuations are not. The overall valuation has compressed by 40% since its peak in 2008, as the market has remained flattish despite the earnings growth. This level, forward earning at around 16 times. On 22000 (31st dec 2007). Presently BSE Sensex EPS is at 1450 & markets at the same level.
  • Historic P/E bands have been around 22-9 which gives a rage of 10000-4100 for Nifty.
  • The earning spread (difference bet ROI - 10 year Gsec Yield) has come down to 5% from its peak of 12% plus ( 2007). This is at its lowest for last 10 years. Probably, it is showing a bottoming out. This fundamental data is monitored by the promoter, FII, MNC. Now can you understand why FII & MNC (Unilever, Glaxo etc) is buying back its own share?
  • Despite the election year, the present Government has gone ahead with OIL sector deregulation & diesel price has increased by 30% in last 3 years. This is probably the biggest reform of the present Government. The under recovery on account of Diesel has come down to Rs 5 from a high of Rs 17. Better fiscal management & current account deficit (Due to Gold import duty hike) has helped its currency (Rupee) to stabilize.
  • Another fundamental aspect which is going to help is an interest rate cycle, which according to many analysts is at its pick. Given the moderation in inflation rate and sluggish economic growth, we feel that increase in interest rate is very unlikely. This is going to help investment cycle to pick up. This is a very important fundamental driver.
  • We believed that Indian market is going benefited from the strong global inflow of capital. Slowdown at china is looming at large, Russia is in War mode & this is certainly going to benefit India.
  • On a sector specific, we are bullish on Banking, Auto, Auto-ancillary & capital goods. Banking (especially Pvt. Banks) should be from major part of the portfolio. FMCG , Metal we are underweight.

Risk

Personally, I believe in trend analysis & market has maintained its trend & given fresh breakout on quarterly chart. But, the only risk at this point of time is fractured political mandate & probably crude oil rally. Though as per Opinion poll, fractured mandate is very unlikely. But, personally, I am bullish on crude & it is going to have its impact on India's economy.

This is written for my reader. One should consult his/ her investment adviser before investing. Pl feel free to give suggestion/ feedback at bonpriya@gmail.com