The global situation could not be more confusing for markets. There is a sharp bounce in crude prices as Saudi Arabia stopped shipments from the Bab-al-Mandeb strait in the Red Sea. That is likely to impact 4.8 million bpd of oil and take prices back to the $80/bbl mark. Secondly, the trade wars are at an all-time high with Trump threatening to bring all of China’s $550 billion US imports under the ambit of tariffs. Above all, the European Central Bank has announced that it will start hiking rates from the end of 2019. But in the midst of all this uncertainty, the Nifty and the Sensex have touched an all-time high. Are we in bubble territory? Actually, markets may be much safer!
Playing the domestic game…
If you look at the stocks that are driving the Nifty higher, they include stocks like ITC, Hindustan Unilever, Reliance, HDFC, HDFC Bank, Infosys TCS etc. What is important for the markets is that none of these are stocks that are likely to be impacted by the trade wars or by global uncertainty on oil. Barring TCS and Infosys, all the other stocks are essentially plays on Indian consumption and are not really contingent on the global risks at all. Then there are stocks like TCS and Infosys which have already gone through their share of pain in the last couple of years and shown their resilience. They could face some hiccups but nothing to really worry about. Yes, markets may be actually safe!
Missing the mid-cap carnage…
There is a popular joke in the stock markets currently that the Nifty 50 should be renamed as Nifty 05 as there are only a handful of stocks driving the Nifty and Sensex. That may be true but what it also implies is that the rising Nifty does not really speak about the carnage that mid caps has suffered. The mid-caps have corrected over 16% since the beginning of 2018 at an index level. If you get down to specific stocks in the mid-cap space, the actual price damage has been to the tune of 50-60% in many cases. The story of small caps is a lot worse. What the SEBI did manage to do with their Additional Surveillance Margins (ASM) is that the froth has been scooped out of the market. That has actually made the market much safer without really impacting the stock market story at the index level!
Now, for the earnings revival!
Interestingly, the real good news in terms of earnings revival may be yet to come. That is what the markets are really counting on! Even if you assume the GDP getting back to 7.5% and the IIP getting back to the 5-6% mark, then we are looking at a sharp revival in corporate profits. Costs have been falling across the board and GST has helped in a big way. While the levels may make one nervous, it may be the right time to get your shopping baskets and look for quality buys now! ©