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By Alpha Research
Apr 17, 2020
A billion-dollar question running right now in the mind of all investors is that‘Where will Indian Equity Market go from here – Up or Down?’
Last couple of months have been very volatile for both Indian and global equity markets due to Covid-19. The Sensex was at its peak on 12th Feb 2020 at 41565. Thereafter, it dropped by ~38% and then has rebound by ~12%. Sensex is still down by 26% from its peak.
Some unanswered questions in the mind of investors are:
Lately, many economists, fund managers, brokerage houses, financial advisors, independent analysts, investors etc. have been trying to answer the above questions and make a prediction/ forecast.
At Alpha Capital, we believe that its impossible to make a prediction about the stock market in short term. Its very difficult to correctly forecast the movement of equity in a shorter time horizon.
Any short-term view on the market is a guess work which is based on various current factors in play, movement of market in past crisis, experience of advisor etc. Sometimes the projected story plays out well and sometimes it gets missed out completely.
Its impossible to predict the market in short term but its important to have a view and biasedness towards a projected story so that action in portfolio can be taken accordingly.
With this article we will try to explain the story which is running in our mind and will accordingly try to answer the question on future movement of equity market.
Some of the dominant factors in play for future movement of equity market are as under:
The future movement of equity market will depend on how the above factors move in future.
We feel that Indian equity market may have two phases of movement. The expected phases are as under:
1) The first upward movement in Indian equity may happen when new cases of Covid-19 peak out in the US. This may be an indicator that the worst is over for the US. The US market may start going up 1-2 weeks before the peak of new cases.
As per Boston Consulting Group (BCG), the peak out of new cases in US will happen in 1st week of May. This is again a prediction, it may happen in end of May, end of April or may have already happened.
The current status of new cases in the US is as under:
Foreign Institutional Investors (FIIs) play an important role in Indian equity market and are big market movers.
The FIIs sold in Feb 2020 & March 2020 and have been net buyers in April 2020 as seen below:
Sensex was down in Feb and March of 2020 and has been positive in April 2020 which is similar to the movement of FII buying as shown in the above table.
We would like to highlight that FIIs are not the only movers of Indian market. Domestic Institutional Investors (DIIs), HNIs etc. are also important factors but it can definitely be said that FIIs are big movers.
We feel that when new cases of Covid-19 peak out in the US, then sentiments will change and FIIs will become net buyers in India and other emerging countries. This will lead to equity market rally and help in covering most of the recent losses.
2) The second phase of market movement will depend on how the economy of India behaves. We will need answers to the following questions:
As of now, we don’t have answers to the above questions. The situation is changing every day. We are watching, analyzing and trying to look at various probabilities of outcomes.
Based on above two phases, it can be said that future movement of Indian equity market will depend on how the Covid-19 crisis moves in US and India.
We are getting better visibility of the US developments and feel that FIIs should come back to Indian market soon which will help in recovering good part of the recent losses.
The Indian part of the story is still playing out and we are hoping to get better picture soon. We are watching the Covid-19 spread in India, impact on economy and Government actions closely.
Would like to highlight that the above analysis is to form a view on the movement of equity market in shorter term. We continue to be bullish on equity with a long-term horizon of 5 year plus. We feel that the currently volatility is a short-term issue which will get resolved soon and market will continue to run upward in long term and deliver expected return.
For investor, its important to have patience and give equity enough time to perform. Short term volatility is the nature of equity and is very much expected.
Take care and stay safe.
