Nifty's love for 11,200 levels in July: Where are the markets headed?

If you believed that the markets have seen a secular bull run over the past few years, think again. Despite the highs and lows that the indices have made over the past few years, Nifty 50 – the benchmark index on the National Stock Exchange (NSE) – has somehow managed to hover around the 11,200 mark in July.

You may call it coincidence, but exactly two years ago on July 27, 2018, the Nifty recorded a closing high of 11,278 levels before scaling up and then losing steam over the next few months. Calendar year 2019 (CY19) saw a similar story play out with the Nifty 50 index hitting a closing high of 11,284 levels on July 26, 2019 before hitting 12,362 levels on January 14, 2020, data from ACE Equity show.

Though the Covid-19 pandemic and the ensuing nation-wide lockdown saw the index slip to 7,610 levels on March 23, 2020, the markets have yet again found their mojo with the Nifty50 index crawling up to 11,215 mark on a closing basis on July 23, 2020.

“From 2010, the Sensex returns have seen compound annual growth (CAGR) of around 6 per cent in rupee terms. In dollar terms, CAGR returns have been abysmal 1.5 per cent over a decade. While we keep getting excited, long-term returns from Indian equities have been below fixed deposit (FD) returns for several years now,” said Shankar Sharma, vice-chairman & joint managing director at First Global. READ INTERVIEW HERE

In line with other Asian peers, Indian equity markets have bounced back sharply from March lows driven by ample global liquidity, vaccine hopes, and relaxation of lockdown restrictions. The near 48 per cent rise in the Nifty50 index from its March 2020 lows has now made analysts a bit cautious, who suggest investors take some money off the table. The outcome and the commentary / guidance by the two key central banks – the US Federal Reserve (US Fed) meeting on July 28 – 29 and the Reserve Bank of India (RBI) in August first week will be key in deciding the market trajectory, at least in the short-term.

As an investment strategy, analysts at Credit Suisse Wealth Management suggest investors remain watchful and invested only in quality companies having strong balance-sheets and earnings visibility.

“Valuations, too, have gone up meaningfully with the Nifty Index now trading at 12-month forward P/E of 20.2, more than two standard deviations above the ten-year average of 15.6. The focus will now shift to rising coronavirus cases as well as on the success of vaccine development. Corporate earnings may see sharp cuts as expected, but investors will focus more on outlook commentary and the path to recovery,” wrote Jitendra Gohil, head of India equity research at Credit Suisse Wealth Management India in a July 16 note co-authored with Premal Kamdar, their equity research analyst.

The sharp retracement in prices of most quality stocks from their mid-March lows has made the market’s reward-risk balance less favorable, say analysts at Kotak Institutional Equities, and cite the following there reasons for their cautious stance.

“Valuations are rich for ‘quality’ non-financial stocks and most are 10-40% above their pre-Covid prices, the near-term outlook is uncertain for financial stocks given limited handle on eventual non-performing loans (NPLs) and credit costs. The ongoing Covid-19 pandemic still poses economic risks,” wrote Sanjeev Prasad, co-head, Kotak Institutional Equities in a July 25 note co-authored with Sunita Baldawa and Anindya Bhowmik.