Nifty Trading Strategy | Overview of Earnings, Valuations and Fund Flows


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Before discussing the impact  of earnings, valuations and fund flows on the outlook for the direction of  Nifty Futures, we would like to update our readers on the short term technical outlook for the markets.

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Nifty Futures in a corrective pull back

In our yesterday’s post Nifty Futures Trading strategy | Hold Shorts and Refrain from Option Writing , we had written that there was a possibility for an upward correction to ensue given the short term oversold market. The opportunity was provided by the disappointing IIP figures which provided the exact bear trap in a shallow market bereft of mass participation. Nifty Futures rallied and closed at 5941.40 (higher than our BUY trigger for aggressive players). Hope all the dare devils bought !

The upward correction is expected to continue for sometime and we expect extreme short term resistance around the 5960 – 5970 levels. The resistance comes from the confluence of the 55 day MA, trend line and upper boundary of the channel. In case the move, continues beyond those levels we could expect prices of 6010. So the bears should refrain from putting any short positions until further signals of weakness emanate. Meanwhile the joyous dare devils should continue to hold their long calls with stops around 5920.

nifty-futures-february-12-2013-upward-correction-continues

Just an upward correction; not a sign of green shoots

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In our weekend post Nifty Futures Sell Off to 5600 on Cards – A Technical View, we had examined the case for a bear market scenario. Today we will examine the outlook on Nifty Futures based on earnings growth, valuations and fund flows.

Nifty earning to experience single digit  CAGR growth over the next couple of years

In the back drop of the political imbroglio, lowered savings and investment rate, deteriorating macro fundamentals and triple whammy of ballooning subsidy, sticky inflation coupled with high interest rates and dwindling exports, NIFTY earning are expected to grow at a single digit CAGR over the next couple of years.

While the honorable Finance Minister, P. Chidambaram has made a case for growth to return amidst fiscal tightening, we do not buy the story.  We are of the opinion that things will only get worse unless the government acts with an iron will. Given the low enthusiasm levels of the present UPA government and policy paralysis we are more bearish than bullish. We would be happy to elucidate our reasoning for a bearish case but that would be subject matter of an entire different post.

Current Nifty valuations reasonable but expensive when compared with global markets

In the aftermath of the Euro zone crisis, NIfty valuations had hit rock bottom in 2012. The depressed valuations provided a dream buying opportunity and FIIs made the most of it. However since the low of 4770 established in 2012, the markets have rebounded handsomely and currently NIFTY is trading at mean valuations.

nifty-forward-pe-bands

Nifty valuations have returned to normal post 2012 Euro crisis

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However when valuations are compared to global peers taking into consideration the earnings growth on a 2 year forward basis, Indian markets are not cheap and global markets provide far more compelling opportunities. Given our bearish stand on the growth outlook for the Indian markets, we believe the confidence is misplaced and sooner than later we expect this to correct.

nifty-valuation-comparison-world-markets

Amongst the above peer set Nifty is the second most expensive market with moderate earnings growth over CY12-14

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Strong FII fund flows sterlized by equally heavy selling by DIIs,  redemptions by retail investors and FPOs.

Since the onset of CY13, FIIs have pumped in a record $ ~7 bn into the Indian equity markets yet the NIFTY returns are negligible. Part of the reason is heavy selling by DIIs coupled with huge FPOs both by the PSU undertakings and the private listed corporates.

FII-india-flows

FIIs pumped nearly USD 7 bn into Indian equity markets since onset of CY13

DFI-india-fund-flows

DFIs have been continuous sellers matching dollar for dollar

world-markets-total-returns-2013-ytd

Despite strong FII flows india market returns have been negligible YTD

Do you believe that the markets will correct sharply as we expect it to?  We would be happy to hear your views in the comments section. Alternately you may participate in the poll below to share your view

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For daily updates on our trading view on Nifty Futures & Options  please send us an email at bolinjkar.vinit@gmail.com or  SMS / WhatsApp on 9730836363. We would be more than happy to oblige our community of investors / traders.

Disclaimer: The opinions expressed here in are strictly for education purpose only. Before investing please make your own thorough analysis or speak to a qualified Certified Financial Planner / Advisor. We are not in any which way responsible for trading losses arising out of  trading decisions taken based on the above. 

This blog is the personal blog of Vinit Bolinjkar. The views expressed in this article are entirely my own and do not reflect the views of my employer. This report is neither an offer nor a solicitation to purchase or sell securities. The information and views expressed herein are believed to be reliable, but no responsibility (or liability) is accepted for errors of fact or opinion. Writers and contributors may be trading in or have positions in the securities mentioned in their articles. Neither http://winningtrades1.com or myself accepts any liability arising out of the above information/articles.

logo Vinit Bolinjkar Head of Research, Ventura Securities Ltd
Vinit Bolinjkar
Winning Trades
| Mobile: +91- 9730836363

http://winningtrades1.com http://in.linkedin.com/in/vinitbolinjkar

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