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Nifty may hit 18400 in March; geopolitical conflict, commodity prices, inflation to direct markets | INTERVIEW

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Bulls continued to dominate Dalal Street on Friday as S&P BSE Sensex rose more than 500 points or 0.92% to breach the 57,300 mark while the NSE Nifty 50 index climbed above 17,100. On-going Russia Ukraine conflict, trend of the commodity prices, inflation direction and growth in the developed world will influence the Indian equity markets going ahead, said Neeraj Chadawar, Head – Quantitative Equity Research, Axis Securities in an interview with Harshita Tyagi of FinancialExpress.com. Nifty may hit 18,400 in March 2023, he added. Here are the excerpts from the interview.

The Indian markets have been extremely volatile lately. After touching 52-week lows, there has been a bounce back. Should investors be cautious or buy now?

The US Fed has increased the interest rates by 75 bps in the July FOMC meeting, which is on an expected line, as all central banks are now focusing on controlling the inflationary scenario by front-loading the rising rates. It remains to see how the sustainable demand scenario pans out in the near term, but we could see inflation touch higher levels in the next couple of months and start to see the moderation path in the next one or two quarters. FED also highlighted that the monetary policy tightens further and could slow the increase in rate hikes with the emergence of economic growth and inflation dynamics. This brings some visibility to the interest rates trajectory and could be a short-term positive for the riskier asset class like equities.

We believe that the worst of the FIIs outflow is behind us and the selling trend is likely to slow down in the upcoming month, and some tapering in the outflows is already visible on July 22. Following macroeconomic developments will continue to influence the market in the near term and limit the upside for the market: 

– On-going Russia Ukraine conflict
– The trend of the commodity prices, including oil
– The direction of the inflation
– Growth in the developed world

Keeping these developments in view, we expect the market performance to remain range-bound in the near term. In the last month, we have seen a cool-off in the volatility, though the current volatility stands lower than LTA, and a clear trend is likely to emerge only when the volatility stays at lower levels for a longer time. We believe the second half of the current fiscal will be less volatile, compared to the first half. Investors should use this volatility in a scatter manner to build a position with a view of 12-18 months in quality companies, where the earnings visibility is very high.

Has Nifty 50 made a bottom? For the next 12 months what could be the best case scenario Nifty?

We are tracking % of stocks trading above 200 DMA in the NSE 500 universe. On June 22, we reached the levels of 18% of stocks trading above 200 DMA (almost equivalent to the historical low). At that time, the market was clearly in an oversold zone. From that level, we have seen a sharp recovery in the market in the last month. Now 36% of the stocks are trading above 200 DMA, indicating that the market has come out of the oversold zone. However, in the near term, the market will continue to be driven by macroeconomic data flow, and performance is likely to be range bound at least for one quarter till the time we see the sign of moderation in the inflation print.

While we continue to hold a positive long-term outlook on the market, supported by a favorable structure emerging as increasing Capex spending is enabling banks to improve credit growth. Moreover, the overall expenditure boost in the Union Budget 2022-23 will help deliver a broad-based growth in FY23. Strong Earnings trajectory continues in the Nifty-50 universe, FY21/22 Nifty EPS grew 15%/37% to 534/734 respectively. A cumulative net profit of NSE 500 universe for the last four quarters reached all-time high levels (crossed Rs 9.5 Lc Cr in Q4FY22). We maintain our Nifty Mar 23 target to 18,400 by valuing it at 20x on FY24 earnings. 

We are halfway through the year 2022 and it has been a volatile journey for investors. What is your outlook for markets for the rest of the year?

It is difficult to predict the short-term performance of the market, as most of the uncertainties have been reduced in the market in the last two-three months and most of the news flows are priced in. Even in this volatile scenario, our market has outperformed most of the global markets in the last year. While the market trend is likely to be range-bound in the near term due to India’s 90% correlation with the US market, it has corrected relatively lower than many global markets. Keeping this in view, we believe that even though the Indian markets will fall along with the global markets, the intensity of this fall is likely to be much lower.

What are the key triggers and drivers for stock markets going ahead?

Normal monsoon brings the expectation of robust festival demand. With the cool-off seen in the majority of the commodity prices from the 52w high brings confidence in the margin recovery for the majority of the corporates, going forward. We have seen a sharp recovery in the services PMI for June, bringing confidence towards robust recovery in economic activities in post covid scenario. We believe the services sector will do better in the upcoming months, as it did in Q1FY23 (Q1 of FY21 and FY22 was the painful year for services due to the Covid 1 and Covid 2 wave). 

Q1FY23 was the first full quarter in the last three years in which we haven’t seen any disruption in the economic activities due to covid. Keeping this in view, domestic-oriented themes are more likely to deliver superior performance moving forward. Further, the market will continue to eye on the direction of the oil and other commodity prices.

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