But the fall in Nifty500 at 8 per cent in 2022 has been pretty comforting, compared with a 16 per cent drop in the S&P500 index during the same period.
Analysts believe domestic stocks may keep outperforming global peers, even as the consolidation phase that has been in place since October 2021, notwithstanding short term bounces, may take its own time to complete.
“In the last decade, the correlation between the Nifty500 and S&P500 has always been positive, apart from minor blips in 2014 and 2019,” said Milan Vaishnav, CMT, MSTA, is a Consulting Technical Analyst and founder of EquityResearch.asia and ChartWizard.ae.
On technical charts, Vaishnav noted that Nifty500 is in a much stronger state than S&P500 — it has not even approached its 100-day moving average.
ETMarkets.com“RS Line of Nifty50 against S&P500 suggests it is in a firm uptrend. The index is also strongly outperforming the S&P500 index on relative terms,” Vaishnav said, adding that the US index needs to stay above 100-DMA of 4,050 to avoid incremental weakness.
What is weighing on markets globally?
Since, there are no signs of Ukraine-Russia war abating, supply shortages have led to high inflation in food and energy. China factories not operating optimally due to Covid surge are also hampering supplies, raising inflationary trend. This has led the US and other developed markets to hike rate aggressively in the last couple of months. Even the RBI, which was aggressively supporting growth to inflation, increased the policy rate by 40 basis points last week. All such concerns have triggered sharp falls in equities.
Valuation guru Aswath Damodaran says if history is any guide, getting inflation under control is going to take time and create significant pain.
“It is the lesson that the US learned in the 1970s and that other countries have learned or chosen to not learn from their encounters with inflation,” he said in a note.
Fed hikes: Bad or good?
Prashant Khemka of White Oak Capital said there have been eight instances in the last four decades when the Fed started raising interest rates.
“In each of those eight instances, the US S&P500 has ended positive at the end of the year or the end of 12 months from the first-rate hike. The average 12-month return is double-digit, some 11 per cent or so is significantly or substantially higher than the average US return over the last four decades, which might be in mid to high single digits. So oftentimes, these beliefs are very firmly held without proper empirical evidence and I am not sure I have seen any firm evidence, I will look it up, or when yield curves flatten out that equity markets struggle,” Khemka told ET NOW.
Flattening US curve & recession
Khemka said it is generally believed that flattening yield curves foresee or foretell a weakening or recessionary economy. He said it might be the case in some instances, but it might not be the case in all instances.
He said the flattening yield curve is nothing but a reflection of differential inflation expectations in the near term and long term. In the near term, because of supply shocks and supply chain breakdown, inflation is high globally in mid-single to high single-digits compared with the low single digits numbers it used to be.
“To fight that, the central banks are expected to substantially and rapidly increase near term rates. The Fed plot is suggesting about a 2-3 per cent rate at the short end within the next year or two. To reflect that the near term rates have gone higher. But long term rates are lower because the market believes long term inflation is contained. Hence there is no material change in the long term bond yields. As a result, the yield curve has flattened,” Khemka said.
India valuations are not cheap
In terms of valuations, the Indian benchmark Nifty50 is trading at a 12-month forward P/E of 19.4 times, which is in line with its 10-year average. Its price to book value, at 3 times, is at a 16 per cent premium to its historical average.
In trailing terms, the index is still trading at a 9 per cent premium to its LPA of 21.1 times, Motilal Oswal said in a note.
What may support the market?
Analysts said that consistent domestic flows are helping domestic stocks perform bette,r even as foreign outflows have touched a whopping Rs 1.4 lakh crore this year.
“Indian markets have largely been supported by domestic flows, including mutual fund flows and direct retail participation. Not only the US, we are also outperforming globally. In the case of Nifty50, key sectors had performed quite well, including IT and Reliance Industries, especially in the Covid period. US digital companies also performed well over the Covid period, and now we are seeing some consolidation,” said Sunil Jain of Nirmal Bang Securities.
“Anyhow we will be growing faster than other countries. If you think the Indian market may go the other way than US stocks, it is unlikely. But we should continue to remain outperformers, even as the days of easy money making are gone. With this consolidation continuing, valuations for many stocks may also turn cheap. The long-term bull run remains intact,” Jain said.
