Nifty Carnage

Are we, at least, close to the bottom?

As the Nifty fell below the psychological 7000 mark, the key question once again arises. Is the worst over? Once the Nifty breached 7200, it was always known that there was no known support till the level of 6800 and a rapid descent was almost inevitable. Does it really make sense to call a bottom on the Nifty?

Valuations are reasonable…

 That is a reality! Valuations have become vastly more reasonable. From quoting at around 21-times 1-year forward earnings the Nifty is now down to around 14.3-times 1-year forward earnings. That almost positions the P/E ratio at the lower end of the historical median band for the index. The big issue over the last one year was below-expected earnings. That led to a distinct downgrade in valuations. Fortunately, the worst may be behind the markets as far as earnings lethargy is concerned. After negative growth for almost 5 quarters, earnings are looking set to get back into positive territory. There is surely a valuation case for the Nifty.

Global cycles may be bottoming…

The two big negative cycles that impacted the markets in the last one year were the oil cycle and the commodities cycle. Thanks to weak demand from China, the prices of most industrial commodities have reached the lows of 1998. Virtually, the entire 15-year commodity cycle has been reversed in the last couple of years. Oil is another case in point. Oil is back to the levels that we last saw in 2004 and global supply imbalance continued to be an issue. But that looks to bottom out sometime in the near future. With oil production becoming uneconomical for most nations in the world, supply disruptions will expedite a bounce in oil prices. That, by itself, may be a major boost for global financial markets.

US may pause on rates…

It now looks increasingly likely that the US may pause on rates. With China slowing considerably, EU and Japan slipping into negative interest rates and global markets in a state of turmoil, the US would do best to put off rate hikes for the time being. At least, Janet Yellen seems to have indirectly conceded to that plea. This will be positive for 2 reasons. The volatility linked to monetary divergence will vanish from the market. Secondly, FII outflows from emerging markets will take a breather.

However all is not yet hunky dory. Some large European and Japanese banks are sitting on piles of bad assets. China’s shadow banking continues to haunt. Global demand and trade is slipping to new lows with each passing day as most economies are contracting. Above all, with zero rates in most countries, central banks do not have too many tools at their disposal. That could be the big challenge to an Indian recovery! ©

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