In the past six months, Nifty 50 has been on a bit of a roller coaster ride, moved 2,000 points and is currently sitting in the middle. The hope is that it has bottomed. But in the past what are the factors that have indicated a bottom is in place?
1. Valuations
On the valuations aspect, we look at two parameters - forward price to earnings and market cap to GDP. History suggests that markets have bottomed when market cap to GDP has been around 60-70 percent and Nifty PE of 13x. But as things stand, we are at some distance from there as market cap to GDP is 90 percent and Nifty PE is at 18x
2. Earnings downgrades not fully discounted
Most on the street are still factoring mid-teens growth for next two fiscals, but there could be some disappointment on that front. So earnings could be scaled back particularly in light of the potential global slowdown as IT earnings get scaled back. In past instances, Nifty earnings have been cut by 10-15 percent before markets have bottomed but as things stand most have either held on to their forward earnings or have scaled back marginally so more scaling back is in store.
3. Yield Focus
a. US Bond yields cooling
During downturns bonds rally while risk assets like equities pull back a bit. During the past crisis, notably Global Financial Crisis (GFC) and during the European debt crisis the US 10-year yield fell by more than 200bps from the peak. The US bonds have just begun to rally and yields are down 70bps from their peak. But as growth outlook worsens which has been further exacerbated by the fallout of global banks the 10 year yields could fall further.
b. Nifty earnings yield gap with US bond yield
Nifty earnings yield currently is approx. 5.5-6 percent and compared with US bond yields, the gap is around 200bps but in the past Nifty earnings yield premium over US 10-year yield has risen to as high as seven percent. This premium could possibly widen owing to both rising earnings yield as well as falling US bond yields.
4. Aggressive rate cuts by Central Bankers Awaited
Fed hike is still on the cards for its May 2023 meeting with the street factoring in 25bps hike. So the rate cuts are awaited but history suggests that markets correct during initial cuts. Only when policy response reaches critical mass do equity markets stabilise.
Conclusion
Milestones for market bottom are still distant.
Headline Index may find resistance at higher levels and see a timewise correction.
Continue to be in a stock specific market.