Jingle on the Street! A harbinger of good times?

Data does not seem to convincingly prove that short periods of high returns are always followed by meagre returns. Only in 4 instances, we had negative returns in the subsequent year.

Jan 01, 2021 10:01 IST India Infoline News Service R. Venkataraman |

It is that time of the year, when we tend to relax, unwind and of course put out our predictions for the coming years. Many of us have given up on resolutions perhaps. I just browsed what I wrote last time, and the world has changed since then, but the prediction seems to remain more or less similar. I wrote about rising Sensex, falling economy and the same theme seems to be playing out as we enter 2021. In a year, when a quarter got washed out due to Covid, very few could have predicted a year-end Nifty level of 13,500.

The trend is everyone’s best friend. So, for now we can see Nifty targets of 15,000 and higher coming.

The economy is clearly improving. Interest rates are low, and will remain so for the next six months at least. Agriculture is doing fine. Real Estate is improving at the margin. Formalization of the economy is happening, which is benefiting listed companies. And worries of Covid are receding despite contrary news coming from Europe. I believe liquidity and low interest rates hold the key. I expect infra spend of the government to rise and that will again provide a boost. The commodity cycle is also showing signs of revival.

Coming to Nifty, it is trading at 22 times 1 year forward, which is a normalized post-Covid earning.  This is expensive despite the fall in interest rates. We are also trading at a premium to emerging markets and earnings growth and ROE do not seem to justify the premium valuation.  But since November, money is moving globally more into equities and travelling up the risk curve. India is getting more than its share of flows. FII inflows into India have seen unprecedented Rs60,000 and counting crores in last two months. Back in March-April period they were sellers to the tune of Rs50,000 crores. This is a complete reversal of stance. Help came from expected quarters, as central banks helped keep rates low.

The FII buying has been offset by an equivalent domestic fund selling, which again was the reverse of what happened in March-April. If the domestic fund selling stops, then technically Nifty will see an upside.  Another interesting aspect is the nature of the FII flows, which are now more driven by ETFs and passive funds. The possible risk for now is, should emerging markets suddenly fall out of flavour; the inflows could come to an abrupt halt. The triggers could be geo-political events or a new strain of Covid virus.

There was Jingle on the Street in December as the week before Christmas saw 7th consecutive weekly gains. A correction of 3.5% on one day during last week got almost nullified as the Nifty closed 0.1% lower. Thanks to all the FII inflows, Nifty rallied about 20% almost non-stop.
 
If one believes in my pet theory of trends and reversals, good returns are followed by stagnant or bad returns so that the law of averages are respected. This is what is getting quoted.

Let us look at some data. In the past Nifty had many instances where it rallied sharply in eight weeks. I have used weekly positive closes as a measure of the strength of the rally and general optimism.
Period Nifty gains (%) No of weeks positive Nifty returns next 12 months (%)
Mar-Apr, 2006 16 7/9 15
Sep-Oct,2007 32 7/8 -51
Apr-May, 2009 47 7/8 14
Mar-Apr, 2010 7 7/9 9
Aug-Sep,2010 12 8/9 -18
Jan-Feb, 2012 16 7/8 6
Sep-Oct,2013 15 6/8 32
May-Jun, 2014 14 4/8 10
Mar-Apr, 2016 12 6/9 19
Jul-Aug, 2018 9 7/8 -6
Mar-Apr, 2019 9 7/8 -16
                                                   
On hindsight, we can always explain the reasons like Global Financial Crisis in 2008, UPA 2 election in 2009, NDA victory in 2014, Covid in 2019 and so on. Clearly, data does not seem to convincingly prove that short periods of high returns are always followed by meagre returns. Only in 4 instances, we had negative returns in the subsequent year.

The recent sharp rally may be a harbinger of good times ahead.

This reminds me of what actor Humphrey Bogart says in Casablanca towards the end of the movie, “I think this is the beginning of a beautiful friendship.” I am tempted to modify the quote to - “I think this is the beginning of a beautiful period. Achche Din may well be just around the corner.”
 
Happy investing.  Stay safe!

This article by R Venkataraman, MD, MD, IIFL Securities was published in ET on December 31, 2020

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