Bernstein India Strategy
We need to recognize the slowdown in the economy.
Earnings misses have been a consistent trend across most sectors, except for banks, which are benefiting from larger companies, and IT, which seems to have finally reached its lowest point.
Apart from healthcare, most major sectors have reported Q2 results that significantly fall short of expectations.
The automotive sector has been impacted by weak demand.
Consumer staples are also experiencing a slowdown in urban areas.
Utilities, industrials, and cement sectors are facing low demand primarily due to weak capital expenditure and monsoon effects.
Discretionary spending is also weak.
The market has not yet fully accounted for the potential extent of the upcoming slowdown.
While monsoon rains and elections may be contributing to the earnings misses, urban slowdowns are likely to offset any rural growth from strong monsoons.
After a long period of strong growth, many investors still view the signs of a slowdown as unusual.
Once the reality sets in, we expect a limited decline in the Nifty index, with a year-end target of 23,500.
Various macroeconomic indicators are also showing signs of a slowdown.
However, we don’t anticipate drastic declines but rather a significant reduction in growth compared to FY24.
We believe that a bottom-up investment strategy in select sectors is a good approach.
According to Bernstein, while rural growth, supported by a good monsoon, is positive, it may not fully offset the urban slowdown. Although growth has slowed across key indicators, this is not a severe drop, but a noticeable decline from last year. Bernstein suggests a focused approach on specific sectors as a good strategy.
Despite October’s market trends, Bernstein notes that earnings expectations have mostly held steady. Some companies view election impacts and above-normal monsoons as temporary factors that affected demand.
Among NSE 100 firms that reported earnings, Bernstein found that around 48% missed estimates by over 4%, marking the highest level since March 2020. Full-year earnings forecasts remain in double digits, though the first half has been almost flat.
CLSA Price Action by Laurence Balanco
The Nifty index’s price action earlier this year after the general election created a “bear trap.”
This bear trap happened when the price action reversed immediately after breaking down from the trading range between March and June.
The Nifty index is still vulnerable after a breakdown in mid-October from the pattern formed between August and October.
This breakdown suggests a potential downside target of 22,990, just below the 200-day moving average, which is currently around 23,493.
If the Nifty falls to the 22,990-23,493 range, we will look for signs from price structure and momentum indicators to identify a good re-entry point.
If these indicators do not show a tradable low at this level, the risk of further declines will remain.
Key support levels are at 23,493, 23,000, and 22,990.
Resistance levels are at 24,694-24,753, 25,112, and 26,277.
Nuvama Alternative and Quantitative Research
Indian equities faced a steep decline in October, the worst since March 2020, and this trend is expected to continue into November as investors adopt a “sell on rally” strategy. According to Nuvama Alternative and Quantitative Research, the total market-wide open interest (OI) in futures markets fell for the first time in 12 months, dropping to 4.068 trillion rupees ($48.38 billion) on November 1, down from 4.802 trillion rupees at the start of October. Nifty futures OI was also down to 281 billion rupees, nearly half of the previous month’s 451 billion rupees.
The Nifty 50 index declined approximately 8% from its all-time high on September 27, primarily due to record foreign equity sales totaling $11.2 billion in October. Analysts at Nuvama suggest that profit booking may continue in November, as the index trades below short-term moving averages. Foreign investors shifted to net short positions worth $1.5 billion in Nifty futures by the end of October, while high-net-worth individuals and retail investors moved to net longs of $2.08 billion, reversing their previous net shorts.
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