Are 'acche din' for markets here already?

The recent rally in Indian equities notwithstanding, the promised good days aren't here yet

Ironically, the only part of Union Budget 2016 that is still being remembered is the controversy over taxing employee provident fund (EPF) withdrawals. All the other proposals have been forgotten, as they should be, as people have moved on. One interesting nugget though- the Nifty hit a new 52-week (intraday) low of 6826 during the Budget session. The last time we were at that level was back in April 2014, a month before the emphatic victory of Modi Sarkar. 

Since Budget 2016, however, the Nifty has roared with enthusiasm. The week ended 4th March 2016 was, as per news reports, the best week in seven years with the Nifty up 6.5% in five trading sessions. Technical chartists would observe that, were the Nifty to move closer to 8,000, it would cross its 200-Day Moving Average (DMA) – resulting in a “Golden Cross”.  This happens when a stock’s shorter term moving average (in this case, the 50-day moving average which is around 7450) breaks above its long-term moving average (200DMA, which is around 7950). This is broadly seen as a positive sign and is the reverse of the more ominous sounding “Death Cross”. If you believe in technical charts, you might sit up and notice. 

On the fundamental side, however, things haven’t changed much in India. Indeed, this rally since late February is global. Equity indices across emerging markets have bounced back, with the MSCI Emerging Markets up about 15% from its low in January. India has simply joined the global rally. There was nothing in the Budget to fundamentally change an investor’s view on India. Even though some of the Budget math appears ambitious, the overall intent of the Government remains encouraging. The Government stuck to its fiscal deficit target for the next financial year and focused on agriculture as a key growth driver. Whether or not the Government’s bet pays off is yet to be seen. But there’s enough to be done outside the Budget and therefore investor attention has, correctly, moved past the Budget.

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Unfortunately, even beyond the Budget, nothing has changed significantly. The bad loan problems of public sector banks remain unresolved and, beyond the headlines made at the Gyan Sangam meet, things remain grim. The RBI would probably cut policy rates at its next meet but even this is now more of a symbolic event. Government bond yields have remained unchanged in the past year, despite 125bps of rate cuts, and – with no improvement in economic growth or fall in inflation – there is simply no case for a big fall in bond yields. 

What then to make of this rally? It depends on which camp you belong to. For traders, this was a good opportunity to make a quick buck. If they believe in the Golden Cross, they should be going long.  If foreign institutional investors (FIIs) continue to rush to India, there might still be some steam left in this ongoing rally. Remember, that from 9,119 (March 2015) to 6,826 (February 2016), the Nifty corrected by a sharp 25% in less than a year. A temporary pullback – even if you can’t time it – is only to be expected.

For long-term investors, the question is whether India has now changed from a ‘sell-the-rally’ market to a ‘buy-the-dip’ market. Valuations are closer to long-term averages but not, by any measure, at a discount. What might tilt things in favor for long-term investors is increasing belief in the Government (structural reform such as resolving the bad loan crisis) and the RBI (rate cuts). That, and a sustained recovery in global markets, might – with the benefit of hindsight – just mark 6800 as the bottom for the Nifty. 

Anupam Gupta is a Chartered Accountant and has worked in equity research since 2000, first as an analyst and now as a consultant. He contributes to the Business Standard platform, Punditry, through his blog, Beyond Markets on markets & the economic horizons. 

He tweets as @b50