Economy is retrograde – but Markets are unsure !


Economy is retrograde – where are Markets headed?

As we attempt to answer tough questions on market, we shall start with a chart of Nifty EPS, Nifty PE and PB since 12th June, 2015. (5 year data taken from

We can observe a sharp dip in Nifty PE/PB ratios given the sharp fall in market in March/April of this year. Perhaps, markets were factoring the worst case on earnings prospect of Nifty companies.

Summarised in table:

DateNifty LevelNifty EPSTrailing Nifty PETrailing Nifty PB
15 Jun – 2015801336122.193.4
14 Jun – 2016810836422.273.4
15 Jun -2017957839624.193.6
15 Jun – 20181081739427.453.7
14 Jun – 20191182340429.263.8

One way to look at the above table is that markets are back to 2017 and headed towards 2018 currently. Economy is most certainly retrograde and markets have retraced back 2years – which will be reflected in Nifty EPS (Earnings per share) for the year. From the current EPS level of 428 we are likely to trace back to 400 this year (if not worse). And hence current levels seem justified.

In 2018 and 2019 we moved to higher levels without any dramatic increase in earnings – on back of positive sentiment and global liquidity. That hope and promise got called out – and Covid was just the proverbial straw which broke camel’s back.

All major brokerages now predict a 5% contraction in economy. From a 4.2% growth in 2019-20 to a likely degrowth of 5% in 2020-21 – it won’t be an easy ascent back. Imagine coming at 95 when we were supposed to be at 105 or consider being demoted to class 8th when we were likely to move to class 10th. So, this will take 2 consecutive years of 5% growth (2022 & 2023) to get us to a level of 105 and us being able to clear class 8th and 9th again, to successfully move to class 10th. To ease this anguish, we have some soothing predictions which say that after negative growth this year there is a likelihood of double-digit growth in the next year. Well, given our economic history and growth trajectory, we would take that with a pinch of salt and avoid exuberance on this count.

Hence, markets are not unjustified in being where they are i.e. 2017 levels. Are we good to knock-out Jun-2018 levels? Fundamentally, for that you either need Nifty earnings to remain flat (i.e. not fall) or PE multiple to expand to 27-28 times. Former is improbable and later is a factor of liquidity & sentiments. For a change, both liquidity and sentiments seem to be flying in full gusto on back of US Government/Fed measures and central bank actions across the globe. But cautionary note here is that liquidity and sentiments are always ephemeral in nature. Its futile to position the trade considering these factors – as they ebb and flow in a whimsical fashion. 

What are we predicting for the rest of the year?

• Our worst case is, economy going back to June 2016 – EPS of 364 and Trailing multiple of 22 times.

• Our best case is economy fast tracking to 2019 – EPS of 404 and trailing multiple of 29 times.

As always, truth lies somewhere in the middle which is represented by 2017 and 2018 numbers. We believe markets look comfortably settled at 2017 numbers. Through this year, markets will keep trying their luck with whatever little glimmers of hope they could collect, to sprint towards the 10800 mark of Jun-2018. 

As of now, the way we are poised, it’s difficult to build a fundamental case which can look beyond this mark and make a dash towards 2019 numbers (11823 on Nifty). But we are hopeful, we should be able to make a justifiable case for it towards the year end.

Caveats to our hypothesis:

Before we conclude this note, we would like to give some scenarios which could cut through all the above estimates and propel the markets to next trajectory. Few being:

1) Additional QE by US Fed and one more round of big liquidity bazooka can fire global markets. This has been a typical global play-book so far and possibility of it getting repeated can’t be ruled out.

2) Economy being put on fast-track by bringing about long-pending reforms. We have been highlighting in all our previous notes that only way to unleash the animal spirits is to usher in structural legal, land, labour reforms. One cannot rule out the possibility of a 1991 like reforms coming our way by 2021 – we have mostly reacted as country, when pushed to a corner of hopelessness!

3) Last, there’s a theorem of “revenge recovery” – which says that consumers will go on binge buying and revenge spending once the Covid scenario improves. We aren’t giving this one a big chance as demand is not just a function of intention or willingness, its equally a function of ability. We believe, ability (buying power) of consumers has got severely dented and will take a while to recover.

So, what are we saying:

Economy is back by 2 years (if not more) – and that has to be the starting baseline now. We would urge all investors to start looking at FY 2022 as year for all computations and assumptions and efface FY2021 to keep things simple. Our take on equities

1) Stay towards the safety of Large and Multi Caps.

2) SIPs should continue and lumpsum should be strictly as per asset allocation requirements beyond 10K level on Nifty.

3) Lumpsum allocations should be broken down as STPs (systematic transfer plans) for 1year minimum and moved gradually in the market. We believe that uptick from thereon could be sharp & sudden and one has to be well-positioned in market to make the most out of it.

4) Any opportunity below 9000 on Nifty is attractive from valuation perspective and keeps getting better with every correction thereon. 

5) As of now, its not a zone of profit-booking or redemptions either, as the markets are mostly range-bound in the fair-value zone.

6) Time frame of holding equities has to be at least 5years and beyond.

7) There is no easy recovery in sight for the market – it’s more likely a painful grind up!

As Voltaire once said: “Doubt is not a pleasant condition but certainty is absurd.” It’s difficult for us to be certain when it comes to Markets – so we continue to be optimistically and cautiously doubtful.