The recovery in domestic equity markets could experience some setbacks as the market cycle moves into the mid-cycle phase, where yields are expected to be subdued and stimulus measures are removed. “Expect turbulence as the Fed shrinks amid weak global growth. But it will likely be a hiccup rather than a 2009 cycle hurdle, as a better national and global macroeconomic environment limits disruption, ”said national brokerage firm Edelweiss. So far, Sensex and Nifty’s 125% rally from March 2020 lows has been called the start of a cycle in which markets generate outsized returns from depressed levels with a revaluation of PE rather than earnings representing most of the returns. However, things should now change.
Summary of previous transitions
The bull run that started in March of last year was a big contributor to the stock market recovery and is akin to the market recoveries of 2003 and 2009, according to Edelweiss. At the start of the middle cycle, the years 2003 and 2009 showed marked differences.
Stock market impact: While in 2003 the transition was successful, in 2009 the same failed. In terms of the impact on the stock markets, the rally in late 2003 saw the stock market fall by 20%, a sharp drop. Meanwhile, in 2009, the correction lasted 12 months.
Earnings: Edelweiss pointed out that in 2003 earnings growth remained relatively strong, although there was some moderation after the Fed rate hike. On the flip side, in 2009 the earnings cycle and the business cycle derailed, with earnings sluggish for nearly five years and even entering a contraction zone for a brief period.
The divergence in 2003 and the 2009 cycle when entering the intermediate phase would be due to the timing of the withdrawal of global stimulus measures and to national macroeconomic situations.
Will the current cycle reflect 2003 or 2009?
In the current cycle, the global growth of the broad money supply, which is the main source of liquidity injection, has slowed down. “Historically, this has been a relatively good harbinger of Nifty returns given the close ties to capital flows from India,” Edelweiss said. However, the broader global money supply is a function of weakening fiscal impulses as well as weak global cycles of credit to the private sector, which could pose a problem during the cycle transition in the medium term.
India’s outperformance relative to its emerging market peers could also pose a risk. Higher valuations in domestic markets have historically led to 6 to 12 months of underperformance. In addition, the timing of the police withdrawal in the current cycle is similar to 2009. However, Edelweiss believes that policymakers are more agile and that the macro environment is more conducive to leverage this time around. “This, along with India’s low macro vulnerability (ala 2003), should ensure limited economic impact,” they added.
Where to invest
At this point, Edelweiss recommends that investors move from laggards and mid caps to market leaders such as large caps. They also advise moving from durable consumer goods to auto stocks and from global cyclicals to national cyclicals and PSUs.
Selection of large cap stocks
TCS – Course target: Rs 4,176
Banque ICICI – Target price: Rs 780
HCL: Technologies – Target price: Rs 1,616
Axis Bank – Target price: Rs 870
Larsen & Toubro – Target price: Rs 1,975
Sun Pharma – Target price: Rs 950
SBI Life – Target price: Rs 1600
Gofrej Consumer – Target price: Rs 1,135
NTPC – Target price: Rs 145
Bajaj Auto – Target price: Rs 4,483
DLF – Target price: Rs 403
ABB – Target price: Rs 1,975
HPCL – Target price: Rs 383