Nifty may recover after Israel’s staged retaliation on Iran

·         Risk trade may be boosted as the ‘war game’ between Israel and Iran ended without causing any serious damage, positive for Gaza war ceasefire

·         But stretched valuation and tepid earnings growth in Q2FY25 may drag Nifty below 23800-23500 levels towards 22500-22200, which is an important technical support zone for Nifty

·         At around 983 revised EPS projection for FY25 (assuming 15% growth from 855 in FY24) and 20-22 fair PE levels, a fair valuation of Nifty may be around 20600

India’s benchmark stock index, Nifty made a 1-month low around 24073.90 Friday (25th Oct 24), the lowest in the last few weeks and corrected over 2200 points, almost -8% from the latest life time high (LTH) 26277.25 for several reasons. After the Indian election in June’24, Nifty soared from around 22800 to 26200; i.e. almost +15% in just around 4 months on hopes & hypes of blockbuster policy reforms under Modi 3.0. But till now there are no visible signs of any concrete plan by Modi 3.0 admin to make India a truly developed economy by 2047; i.e. 100 years of India’s independence. India may become a $5T economy by the next 5-10 years in terms of nominal GDP, not real GDP naturally due to its huge population; it’s an arithmetical eventuality irrespective of NDA or IND government. Despite being the 5th largest economy, India remains at the lowest in terms of G20 amid jobless/K-Shaped economic growths.

The recent small correction of around 8% in Nifty may be due to various factors like:

Stretched/bubble valuation of the Indian market:

At TTM EPS around 873 and LTH 26277, the TTM PE of Nifty was above 30 and even at 24000 Nifty levels, TTM Nifty PE is over 27, while the overall trend of Q2FY25 report card till now is subdued and may not grow over +10% (y/y). Although the expected Nifty EPS for FY25 is around 1026 against FY24 actual EPS 855 assuming +20% growths, now it seems that it may be even below the trend rate of 15% to around 12-10% considering the early trend of the Q2FY25 report card amid tepid domestic and external demand.

Nifty EPS's subdued growth may be due to elevated unemployment/under-employment for a vast section of the labor force, elevated inflation/higher cost of living, tepid consumer spending on discretionary goods & services, stress on banks & financials (lingering higher borrowing costs causing higher NPA), tepid external demand (export) due to various geo-political issues (fragmentation and stalled USDINR for the last few years due to constant RBI intervention) and structural issues in GST having too many conflicting rates/slabs-still recalibrating almost every quarter and high cost of compliance; SMEs are affecting mostly.

As per our calculation, FY24 Nifty EPS was around 855; assuming an average EPS growth of around +15%, the estimated revised FY25 EPS maybe around 983 and with a fair PE of 20-22 (against average EPS growth of 15%), the fair value of Nifty should be around 19665-21632 (~20600) for FY25. As the financial market usually discounts one year of EPS in advance, the current fair (neutral) value of Nifty should be around 20600 at a median PE of 20-22, while the bullish zone may be around 24581 and the panic (bear) zone may be around 14749 (for any global financial crisis).

Lingering geopolitical tensions:

Growing geopolitical tensions in the Middle East/Gaza/Lebanon/Yemen war with Israel; Iran may get involved directly; also growing Nuke narrative by Russia/Putin. For India, higher global oil price is a headwind as the country imports almost 85% of domestic consumption of oil.

Increasing FII outflow and China’s gain/ India’s pain:

For India, now CNYINR FX rate is also vital due to heavy dependence on the import of various goods from China; CNYINR has appreciated over 100% in the last five years from around 5.00 to over 11.00, causing higher imported inflation for non-oil goods. FPIs may be also diverting funds to other key Southeast Asian and South American markets from India due to cheaper valuation and better economic/development conditions.

After the Chinese stimulus; FPIs/FIIs may be exiting the overvalued Indian market to the under/fair-valued Chinese market. Even though Nifty corrected almost 2000 points from around 26450 to 24450, at around 24500 levels and TTM (Q1FY25) EPS 873, present NIFTY PE (TTM) is now around 28, still substantially higher than the fair PE range 20-22 and China’s present PE around 15. Also, increasing geo-political tensions between China and Canada and possibly increasing selling by Canadian SWF are affecting retail sentiment. Apart from China, and Hong Kong, FPIs are also heading for Japan, Taiwan, and the Philippines.

But at the end of the day, most of the selling by FPIs (INR 2.27T) is being absorbed by Indian DIIs (INR 4.39T), and thus net institution buy is still well into positive to the tune of INR 2.12T. On the other side, Indian retailers/HNIs/NRIs also sold to the tune of INR 1.18T, while PROP Firms/Brokers absorbed (bought) INR 0.94T. Thus overall net buying by Indian DIIs and PROP/Broker firms is now around INR 1.88T for the Indian stock market (YTD) against net selling by FPIs and retails/HNIs/NRIs.

For Oct’24 (till 25th), FPIs sold around Rs.1.00T, while DIIs bought around Rs.0.97T, while net retail selling after adjustment of PROP/Brokers absorption is around Rs.-0.01T, leaving net sell Rs.-0.04T; i.e. only around Rs.-4000 cr (Rs.40B), not much if we consider the total size of the Indian stock market.

In India, most of the FPIs fund Indian black money originating from political corruption round-tripping through the FII route, especially ahead of an election to fund unofficial election expenses. Overall, the Indian stock market is also heavily dependent on India’s black economy, which mostly originated from political/establishment/government corruption (as 20-40% cut money from various traditional and social infra projects).

Gradual withdrawal of Yen carries trade:

Global/US/EU Risk trade is also under stress on the gradual withdrawal of Yen carry trade as BOJ may hike the repo rate to 2.00-2.50% by 2026-27 from present +0.50% (exit of BOJ from Japan’s ultra-loose monetary policies and a cycle of deflation for a decade)

Stagflation or even recession-like economic situation in EU/Germany and Canada:

Now, the ECB, and BOC are cutting rates back-to-back in a panic-like situation (crisis times) to avoid an all-out recession, although the EU/German and also Canadian economies are suffering from decades of structural issues despite lower borrowing costs. Except for, the US, almost all other G7 countries are now in an extreme slowdown, facing almost a recession-like situation along with elevated unemployment. The market is now concerned about a hard landing in most of the G7 economies except the US.

US Election uncertainty/Trump 2.0 concern:

Also, stock markets on both sides of the Atlantic, as well as the Pacific, may be concerned about Trump's trade war tantrum 2.0; Wall Street may prefer Harris for policy continuity and predictability rather than Trump’s bellicose policies and unpredictability. If Trump indeed wins the US Presidential election with a Trifecta (simple majority), it may be negative for EM/China/India and even Europe and also the US market for Trump trade war tantrum 2.0 and policy uncertainty.

High probability of an imminent Economic slowdown in India:

Various high-frequency data and automobile recession may be indicating an imminent economic slowdown in India. Also, lingering higher borrowing costs, elevated inflation/cost of living, higher unemployment/under-employment and lack of quality employment for educated youths and subsequent tepid consumer spending and private capex due to subdued demand are flashing red light.

Increasing political & policy uncertainty in Modi 3.0 minority government:

There has been no significant economic reform (like in the labor market) so far in the first 100 days of Modi 3.0, which is now too preoccupied with electoral politics, operation Lotus, and Foreign diplomacy; Modi may be now in the pre-retirement mood. India’s PM Modi may not be comfortable with coalition politics amid falling popularity, and internal conflict within BJP/RSS over his arrogance, autocratic behavior and Operation Lotus/Washing Machine strategy to bring non-BJP political leaders into BJP and giving election tickets to them.

There may be growing political uncertainty as Modi 3.0 may find it very tough in the forthcoming Maharashtra and Jharkhand elections followed by Bihar and Delhi in early 2025. Thus if Modi can’t consolidate his power in the forthcoming state elections (after the recent general election setback), he may have no other option but to opt for a face-saving early exit from active electoral politics by Dec’25 or even before on BJP’s 75-year mandatory retirement policy/

Indian market may not enjoy further EM scarcity and Modi premium:

The Indian market has long enjoyed Modi and EM scarcity premium for the last 10 years amid political and policy stability under Modi 1.0 and 2.0. But despite a decade of political stability and the appeal of Modinomics and 6D (demand, demography, development, deregulation, digitalization and democracy), the PM Modi/BJP government was unable to unleash any major economic reform in the labor market, innovation and manufacturing sector to make India competitive to China. Without a big export-oriented competitive manufacturing sector ensuring quality, quantity and affordability (like China), India may not be able to resolve the mass unemployment/under-employment crisis fully. Without mass employment, India’s demographic tailwinds may turn into headwinds; the so-called demographic dividend is now gradually turning into a demographic nightmare/challenge.

India may be heading for multi-party electoral democratic chaos rather than two-party stable democracies:

On the political front, although Dalal Street was relieved to some extent from BJP’s unexpected win at the recent Haryana (HR) state election, the fact that it was won amid Congress’ organizational/election mismanagement/internal issues rather than any Modi wind/wave. Also, Congress was the victim of its caste politics play card this time in Haryana unlike in the June General election, when BJP was the victim. But overall, as the HR election was won by BJP without the significant contribution of Modi/Sha & Co (Gujrat-GJ lobby), the Nagpur/RSS lobby may now also get more confidence that BJP can win an election without even Modi or his active contribution.

Now looking ahead, the upcoming Maharashtra (MH) election may be crucial not only for political permutation & combinations but also for political funding as MH is the economic capital of India. Thus BJP/Modi & Co (GJ lobby) is trying its best (by hook or crook) to win this time at any cost after a terrible defeat in the recent general election.

Overall, BJP/NDA is set to lose big to the IND/INC alliance in the forthcoming MH state election due to various factors going against Modi & Co; but still looking at the surprising HR election, BJP/NDA may also offer good performance in the Maharashtra and Jharkhand election or even win. This will keep BJP in an upbeat mood to win in Bihar and Delhi elections early 2025 and Modi & Co may regain strength with the party/organization (BJP/RSS) to continue the full term till 2029 without any early retirement in 2025.

But the opposite is also true and in any case; Indian PM Modi may not contest after his 3rd term expires in early 2029. Without the Modi wave, the BJP may win 150 and INC 150 seats on average in the next general election, while various regional parties across various states may get the rest of the 250 seats. Thus political and policy uncertainty may be on the rise in the coming days/years as the ‘Golden age’ of Modinomics is almost over after a decade.

Also, even after ten years of the Modi era, India’s development is still incremental if we measure infra, transport/traditional and also social infra/development, elevated unemployment/under-employment and youth unemployment, and sticky inflation despite years of higher borrowing costs. India’s so-called demographic dividends because of its relatively younger population are now turning into a demographic challenge/nightmare amid a lack of adequate good quality jobs/self-employment opportunities for the huge number of unemployed educated youths. This may cause some social unrest in the country if not tackled properly by politicians and policymakers.

Also, India’s high taxation on goods & services (indirect taxes) is affecting consumption (consumer spending) and in turn, production. India’s automobile industry is now facing a severe slowdown or recession-like scenario due to not only EV transition issues but also higher borrowing costs, higher regulatory costs (like high road tax, insurance costs, toll tax, registration costs, and even higher parking costs in a metro city/major town). The cost of maintaining a car is quite high for an Indian middle-class family in India.

Similarly, the regulatory costs of a small business (SME/MSME) in India are quite high; making the business unsustainable which in turn affects self-employment or the overall employment situation in the country. India’s unemployment rate remains around 8.0% on average, almost at double-digit levels for the last two decades due to the increasing population/labor force and limited job creation for the masses.

Increasing regulatory tightening for retails by SEBI, India’s market regulator:

Additionally, recent regulatory tightening by SEBI on derivative (FNO) trading to discourage loss-making retail traders may be also affecting volume and causing excessive volatility.  But SEBI’s policy of very high requirement of margin in FNO trading may be also negative for retail traders and SEBI should allow partial lots like foreign CFD providers to encourage retail traders to gather knowledge and experience and also to properly hedge their underlying investments through FNO.

Still hawkish RBI:

There is no indication of any rate cut even in Dec’24 as RBI generally does not give any specific forward guidance like Fed/ECB. A hawkish hold by RBI and forecast of lower GDP growth and higher inflation; i.e. stagflation/stagnation-like scenario also dragged the market. Although RBI has changed its stance to neutral from its present restrictive and hold rate with a hawkish tone, RBI may start cutting rates from Dec’24 or Feb’25 in line with Fed.

But if RBI does not follow the Fed in rate cuts/easing in 2025, USDINR will depreciate more, which would be negative for export-heavy Nifty as almost 50% of Nifty EPS comes from export and 30% from banks & financials. Lingering higher borrowing costs and a weaker labor market may be also causing higher NPA. RBI may be already behind the curve. Although the higher restrictive rate may be slowing down the core economy too much as evident from around 3% core CPI levels for the last few quarters against +4.0% targets, RBI is still targeting food inflation-heavy total CPI, which is consistently hovering around +5.0% levels on an average for the last few years against +4.0% targets, preventing RBI from rate cuts.

Bottom line:

Looking ahead, Israel’s much-awaited staged retaliation against Iran to meet domestic political compulsion may be positive for the risk trade and negative for Gold & oil as an element of uncertainty has been removed. After the US election, we may see Gaza and Ukraine war ceasefire under Trump 2.0. Even under Harris 1.0, we may see a Gaza war ceasefire as Israel now thinks that Hezbollah and Hamas are not in a state to launch any serious attack on Israel. Thus Israel may now focus on ceasefire and hostage deal with Hamas. This may be positive for the Indian market also, at least temporarily as subdued earnings growth may also bring Nifty later, even below 23800-23500 levels, towards 22500-22200, which is an important technical support zone for Nifty.

Technical trading levels: Nifty/India 50 Future/CFD

Whatever may be the fundamental narrative, technically Nifty Future/ India 50 CFD (24150) has to sustain over 24500 for any rebound to 24700/24900-25200/254450* and further rally to 25650/26000-26200/26500 and 26650*/26800-27000/27200* in the coming days; otherwise sustaining below 24450-24350, India 50 may further fall 24050/23950*-23800*/23550-23450/23350 and further to 23000/22850-22500/22150 in the coming days.