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State of the market: It is not the time to be complacent


India’s macro-economic position has weakened over the past few months. High frequency indicators such as vehicle sales data, IIP numbers, rail freight traffic and petroleum product consumption suggest a slowdown.

Global crude oil prices have rebounded to around $70, which will have an impact on the buffers available for current account deficit and fiscal deficit. Low oil prices may have allowed the government enough room to increase excise duty on auto fuels, which would have helped the fiscal position.

Overall, central and state off-balance sheet borrowings have all depicted a shaky fiscal position with lower-than-estimated revenues, leading to spending cuts.

After the recent surge in stock prices, top down market valuations no longer look attractive compared with historical averages. Even if one looks at stocks, most look fairly valued and on an overall basis, it is tough to justify any upside at this stage.

Valuations of most growth stocks continue to be stretched while a few value stocks have also seen considerable rerating. Bond and earning yields have converged in the recent past due to the rally seen in bond yields and here too the market levels are not looking very attractive.

It should also be seen in light of the fact that bond yields have been distorted due to large OMO purchases and earnings downgrades are still not ruled out.

Earnings expectations do offer some respite though, with possible downside risks. In terms of quality of earnings, a large part it is expected from normalisation of PSU profits and that in certain private corporate banks, while rupee depreciation should support profits of global commodity and IT companies.

There are potential risks in case there is a further slowdown in consumption aggravated by potential sub-normal monsoons due to El Nino effects.

With regard to the outcome of the ongoing elections, the market seems to be reasonably confident of the BJP forming the next government, maybe with lower number seats compared with that in 2014. Recent opinion polls suggest the BJP-led NDA coalition is set to win around 270-310 seats, comfortably ahead of the midway mark of 272. One needs to be cognizant of the fact that while opinion polls were right in terms of directions in 2009 and 2014, there was still a material difference in the number of actual seat wins from those projected. So a shock outcome can bring in its own share of volatility.

Source: Economic Times