The domestic market has been on a roll for the last two months. Equity barometer Sensex has recovered more than 16% from its 52-week low of 50921.22 that it hit on June 17, 2022.
The sentiment appears upbeat. The biggest fears about rate hikes seem to have eased as investors hope that the US Fed may soften its aggressive course of rate hikes after the latest data showed inflation remained flat in the US in July.
A fall in gasoline prices cooled inflation as the US consumer prices were unchanged on a monthly basis in July.
On the macro front, crude oil prices have fallen amid anticipation of low demand and a supply glut which is a major comforting factor. Brent Crude trades near the $95 a barrel mark.
Analysts and rating agencies believe that India could be one of the best performing economies in FY23. As reported by Reuters, "Morgan Stanley economists believe India could emerge as Asia's strongest economy in 2022-2023 as it is best-positioned to generate robust domestic demand, helped by economic policy reforms, a young workforce and business investments."
Quarterly earnings, too, have not been disappointing and the Q1FY23 earnings have not thrown any negative surprises so far.
Healthy buying by foreign portfolio investors (FPIs) has also boosted sentiment. As per NSDL data, FPIs have pumped in ₹17,306 crore in the Indian financial market in August so far.
All is well. Really?
Superficially, it appears that the market has comforting factors but it is early to think that the up-move has begun and the market has fewer reasons to worry about.
The troika of sticky inflation, rate hikes and a recession is very much here to derail the rally.
Inflation in the US remained flat in July but it did not fall significantly. It is still at a multi-year high level and the US Fed has clearly said that the pace of rate hike may not slow down at least for the next few months.
"The consumer price index rose 8.5% in July from a year earlier. While that marked a drop from June's 9.1% rate, prices are still rising at levels not seen since the 1970s and early 1980s. Food prices in July were up 11% from the year before," reported Reuters.
Fed understands it is early to think that their fight against inflation has started yielding results since wages and rents are still rising in the US.
In an interview with the Financial Times, Mary Daly, president of the San Francisco branch of the Us Fed said inflation still remains far too high and not near the Fed's price stability goal.
As per a Reuters report, Minneapolis Federal Reserve Bank President Neel Kashkari said the US central bank will need to raise its policy rate another 1.5 percentage points this year and more in 2023, even if that causes a recession.
"The near-term texture of the market is likely to be bullish. But this need not sustain for two reasons. One, market valuations are high and this will attract profit booking. Two, details of the US inflation data reveal that inflation is unlikely to drift down steadily since wage growth and rents continue to rise. So, the Fed may continue to be hawkish impacting market optimism," said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
It is now a common belief that the global economy is staring at an imminent recession. Shrinking growth and faster rate hikes have dealt a blow to the economies that were yet to recover from the Covid shock. The market might have factored in a moderation in global growth, but it is still uncertain what will be the magnitude, extent and impact of the recession.
As experts point out, the Bank of England warned last week that the UK probably will enter recession in the fourth quarter of this year and keep shrinking for the whole of next year.
Indian economy so far looks resilient but it cannot decouple from the global trend completely.
Geopolitical tensions are also among the biggest threats that can blow a severe blow to the market. The Ukraine war continues while the Taiwan episode is another threat.
As per a Reuters report, Taiwan rejected the "one country, two systems" model proposed by Beijing in a white paper published this week. The Taiwan issue has the potential to damage the US-China relationship significantly and reports suggest that the US administration is rethinking its steps on China tariffs.
"China's war games around Taiwan have led Biden administration officials to recalibrate their thinking on whether to scrap some tariffs or potentially impose others on Beijing," Reuters reported, quoting sources familiar with the deliberations.
Uncertainty still prevails. BofA Securities is cautious on markets and it expects a 10% downside in Nifty from the current levels.
"We remain on the current volatile environment and looming global recession concerns as reflected by consensus downgrading Nifty FY23/24 earnings (YTD -2.5%/-2.2%). With the recent market rally, the Nifty currently trades at 19.2 times 12-month forward P/E (13% premium to 10-year average). With BofA analysts upgrading earnings in autos, industrials and energy, our year-end Nifty target, valued at its 10-year average of 17 times 12-month forward P/E, changes to 15,600, which implies a 10% downside from current levels," said BofA Securities.
So, what should you do?
Stay cautious and buy quality stocks on dips. "We advise a cautious approach for a few more weeks to get an idea of how the direction of the Taiwan issue is going to be. Till then we suggest an equity research strategy of at least 5% cash in the equity asset class and tilt towards large caps and FMCG stocks," said G. Chokkalingam, Founder & Head of Research, Equinomics Research & Advisory Private Ltd.
Disclaimer: The views and recommendations are those of individual analysts or broking firms and not of MintGenie.