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    What's next for Nifty? 2009, 2003 market cycles offer clues

    Synopsis

    History suggests India’s 125 per cent re-rating-driven rally from March 2020 lows was similar to early market cycles of 2003 (Nifty up 91 per cent) and 2009 (Nifty up 138 per cent) where the market delivered outsized returns from depressed levels, thanks to low cost of capital.

    Morgan Stanley recommends staying selective in midcap IT stocks
    In 2003, the markets corrected by 20 per cent around a Fed lift-off. But it was short-lived and the losses were recouped quickly, Edelweiss said, noting that there was no major fallout on earnings.
    NEW DELHI: With investors largely expecting the US Federal Reserve to kick off tapering by the year-end, the domestic market looks set to enter a mid-cycle transition where it could be vulnerable to a sell-off, said analysts.

    History suggests India’s 125 per cent re-rating-driven rally from March 2020 lows was similar to early market cycles of 2003 (Nifty up 91 per cent) and 2009 (Nifty up 138 per cent) where the market delivered outsized returns from depressed levels, thanks to low cost of capital.

    Early cycle

    But the impact of the second phase or mid-cycle, which was triggered by the withdrawal of policy support, varied in 2003 and 2009.

    Midcycle

    In 2003 cycle , the markets corrected by 20 per cent around a Fed lift-off. But it was short-lived and the losses were recouped quickly, Edelweiss said, noting that there was no major fallout on earnings.

    In the 2009 cycle, however, the earnings got derailed and the market entered a three-year bear phase. The divergence between the two market cycles was due to global stimulus withdrawal amid weaker credit growth and domestic macros in the 2009 cycle, Edelweiss said in a detailed note.

    Earnings growth

    "Today, global stimulus is being withdrawn when credit cycles are weak. However, the cycle is unlikely to be derailed as policymakers are more agile, global environment conducive for leverage and domestic vulnerabilities are low (CAD, banking sector liquidity in surplus, a la 2003). Nonetheless, slowing global growth, Fed tapering and high valuation premium to EM (emerging markets) warrant caution," Edelweiss said.

    Crisil Ratings gave the example of the 2013 taper tantrum and suggested that other central banks could soon start mirroring Fed moves, which would spell the beginning of a gradual draw-down of ample global liquidity.

    It noted that the rupee was the second-worst performing EM currency when the Fed last started purchasing fewer bonds in 2013. "Other than the risk of capital exit, tapering would come at a time when EMs are lagging advanced economies in post-pandemic recovery. Moreover, though the Fed appears confident about inflation for now, any surprises on the upside for an extended period of time could prompt a faster-than-expected normalisation," Crisil said.

    Edelweiss said it expects turbulence but it was likely to be a hiccup rather than 2009-style weakness.

    Return

    Where to invest?
    JM Financial has a Nifty50 target range of 16,500-18,000 for the next 12 months. It sees India’s growth moderating as positive impulses from key drivers of post-pandemic recovery — i.e., rebound in global trade and fiscal expansion — fade in the second half of FY22 and FY23. "In the context of an imminent growth slowdown, performance would be driven by sectors and stock-specific growth; relative better growth will attract premium valuations, in our view," it said.

    This brokerage was selectively positive on capital goods and banks and underweight on metal. Mid and smallcaps have rebounded on “dovish taper” enthusiasm but have still underperformed on monthly returns and their relative valuations to large caps and Nifty50 remain elevated, JM Financial said, adding it preferred IT services, and consumption themes.

    Edelweiss said it prefers largecaps over smallcaps, domestic cyclicals such as BFSI and PSUs over global cyclicals and auto sector over consumer durables.




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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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