Sensex @35K: Beware the BEARS

The bulls don’t seem willing to give up at all. The BSE S&P Sensex and the NSE Nifty are rising relentlessly, in line with global markets. A number of shares from the small- and mid-cap segments are ruling at astronomical levels.

In a bull market, everything looks good, including bad news!

Those who thinks that the bull party is not eternal, should keep an eye on these five factors — Budget, earnings, America, rates and small-cap stocks (BEARS). For, these could have a big impact on the bull party in 2018.

Budget: All eyes will be on the Union Budget, the last full-fledged one from the Narendra Modi-led government before the country goes to polls in May 2019. The Budget, which would be presented on February 1, is widely expected to give a fillip to the rural economy.

Better indirect tax and divestment revenue realisations will help the government spend more on infrastructure and rural growth. After the hard-fought Gujarat Assembly elections, the Budget will have a lot of sops for agriculture and allied industries.

Expectations are also running high for a big relief on direct tax rates, especially for individuals in the lower income bracket. For capital markets, there could be some tweak on securities transaction tax and also extension of long-term capital gains tax benefits to three years from the current one year.

Earnings: One doesn’t need to be a genius to tell that unless toplines and bottomlines see a pick-up, the current valuations cannot sustain.

The price-to-earnings ratio for the Sensex at 26 and the NSE Nifty 50 at 27.44 are re-igniting fears of a repeat of the 2007-08 financial crisis.

While the quarter is expected to show modest growth, with GST and demonetisation behind, corporate India should show perceptible pick-up in growth from Q4 of FY18.

CRISIL Research expects higher realisations in steel, aluminium, cement and crude oil-linked sectors, while a pick-up in consumption-driven sectors, such as auto, airlines and retail, along with resolution of GST-linked issues, are expected to lift growth.

America: Love or hate, but no one can ignore the US market, as it will continue to drive global market sentiments. With interest rates already inching higher in the US, actions by the US Federal Reserve will be closely monitored now than ever before, across the globe.

RBI & interest rate: Inflation remains a structural issue for India, given the slower growth in supply and increasing rural and urban food consumption. Rising food inflation and high oil prices provide very little headroom to the RBI. While the government is pushing for a rate cut, if inflation is not tamed, the RBI would have no option but to increase rates.

Small/mid-caps: The BSE Small-Cap and Mid-Cap indices have beaten Sensex and Nifty by handsome margins in the last three years. The PE ratio of the BSE Small-cap index stood at 129, while that of the BSE Mid-cap index ruled at 50 — both at higher levels than they were during the tech bubble of year 2000 and the financial crisis of 2008. These stocks are vulnerable to falls, as current valuations cannot be sustained unless there is a strong pick-up in fundamentals of these companies. Any margin call due to panic selling on a few stocks could unnerve the whole market.

However, for smart investors, there are always value picks.

As ace investor Porinju Veliyath says: “Being sceptical is the fashion of the day. Caution makes you sound more intelligent and is a safe stand to take in public discourse. But there is no takeaway from it. Buying an overpriced stock at 8,000 Nifty is not any less riskier than buying it at 11,000 Nifty.”

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