Nifty: Fundamental Analysis

In recent times, Nifty is disturbed by these 3 things:

• Impact of the Ukraine war
• Impact of US Fed rate hike
• Impact of Inflation

We would like to put effort to understand the impact by looking at the Historical evidence:

IMPACT OF THE UKRAINE WAR:

• In 1986, the Libya Bombing happened: the Market Declined by 6% but recovered in 24 days
• In March 1999, the Kosovo bombing happened: Market Declined by 14.1% & but recovered in 29 days
• In September 2001, the Twin Tower attack (9/11) happened: Market Declined by: 22.4% but recovered in 48 days
• In March 2003, the Iraq war happened: Market Declined by 9.4% but recovered in 49 days

IMPACT OF US FED RATE HIKE

• Between April 04 and April 06 – the US hiked the rate from 1.03% to 4.86%: Nifty delivered 95% during this period.
• Between Dec 15 and Dec 18 – the US hiked the rate from 0.13% to 2.40%: Nifty return during this period was 36.5%

Like the above-stated examples, in 11 out of 12 previous Fed rate hikes (which is 91.66%), Indian markets gave positive returns…

IMPACT OF INFLATION

Whenever inflation was contained within 10%, it has helped the Indian Equity market.
Also, moderate inflation has been kind to equities so far. Now we have more advantages, than ever before.

Now we have more advantages, than ever before :

• We have the Strong Nifty earnings
• Nifty at 20.8 times now is not on the expensive side as we have seen up to 25 times in
  past.
• Strong reforms like GST provide structural stability.
• Banks are now at their peak of health and ready to fire if credit growth comes back.
• Corporate balance sheets have the least leverage currently as they repaid debts out
  of savings from the corporate tax cut.
•  India is going to be the fastest-growing economy in the world as per IMF.
• We have strong growth favoring the Central bank.

Macro Factors reasonably Strong:

We believe pressure on the Current Account will reduce as War situation eases, Inflation cools down, as Crude Prices subside.

Domestic Growth has been good as visible from the fact that GST mop-up hits a record high of Rs 1.68 trn in April 2022 on robust business activity.

Analogy:

• Last 15 years Average P/E3 of Nifty is 18 X
• Considering EPS (FY 2023E), Nifty is trading at 18.11 times Forward P/E currently.
• Last 15 years Nifty has created Peak between 22 times – 24 times P/E Multiple.
• The projected consensus of EPS for FY 2024E is 1024.
• Traditionally Market discounts EPS growth 3 months in advance (generally December month of the Calendar).

Estimate of Nifty @ Dec 2023:

Scenario I:  Market trades @18 Times P/E multiple in Dec 2023
Nifty Level = P/E Multiple X EPS = 18 X 1024 = 18432 (15% upside from present level)

Scenario II: Market trades @22 Times P/E multiple in Dec 2023
Nifty Level = P/E Multiple X EPS = 22 X 1024 = 22528 (40% upside from present level)

 

To conclude;

Every sideways market will be an opportunity in the hindsight. Fundamental Analysis receives renewed Conviction from the Technical Analysis also as briefed below

Nifty: Technical Analysis

Elliott Wave Theory is a form of Technical Analysis that looks for recurrent long-term
price patterns related to persistent changes in investor sentiment and psychology. The
Elliott Wave Theory states that 5 Waves move in the direction of the main trend,
followed by three waves in a correction (totaling a 5-3 move).

 

Wave [1] started from 7511 to 9989, followed by Wave [2] from 9989 to 8806 levels.

The Wave [3] was completed from 8806 to 18604. As per Elliott Wave Theory 3rd Wave is
generally Steep and Strong. In our case too, Wave [3] rose to 9798 points from 8806 without any substantial corrections in a span of 17 months.

Wave [4] started from 18604 either be completed at 15671 0n March 6, 2022, or maybe in progress, meaning if 15671 is breached, Nifty can consolidate at around 15200 – 15400 levels.

We also believe if the Nifty breached its previous low of 15671, it will not stay there for long.

According to Elliott Wave Theory, Wave [5] will retrace 61% of a total move [of Wave (3)] i.e., 8806 – 18604 = 61% of 9798 =5976 points.

Scenario I: Wave [5] Retrace 61% from low of 15671, then Nifty Target comes to 21647
Nifty Target = 15671 + 61% of (18604 – 8806) = 21647 (Gain of 33% from current level)

Scenario II: Wave [5] Retrace 61% from low of 15200, then Nifty Target comes to 21176 
Nifty Target = 15200 + 61% of (18604 – 8806) = 21176 (Gain of 30% from current level)

“The Entrance Strategy is Actually More Important than the Exit Strategy.