Nifty50 might be see bear action on fear of muted earnings and stagflation

• Analysts expect the market to witness another round of correction as earnings seasons kickstart.
• Nifty 50 is expected to see 10% downside due to potential recession, slowdown and stagflation.
• Further, interest rate hikes at home will continue to fuel outflows from the market.

As earnings season is about to begin this week with TCS and DMart coming out with their quarterly performance, there are traders who have already started betting that the market will fall this season due to poor corporate earnings.

Ambareesh Baliga, an independent market analyst confirms that traders have been shorting heavily on the lower side of Nifty 50 at around 14,000 -15,000 as the mood has turned negative right before the earnings season.

Nifty50 has been hovering between 15,500 and 16,000 for the last two months.

Due to the post-pandemic effect, the earnings growth has been solid at 41% in FY22 but a lot has changed since then with domestic and external factors like policy tightening, inflation, the Russia-Ukraine war and a declining Rupee – all these factors could come together and weigh down earnings.

“We expect an earnings downgrade of 15-20% due to expected economic slowdown and the higher base of FY22,” said the report. As per the consensus, expected earnings growth for FY23 was 16% and was supposed to slow down slightly in FY24 at 14%.

For the very same reasons, analysts at JM Financial too are expecting a 10% further downside in Nifty 50 on lower earnings expectations.

“The steeper slowdown is attributable to known factors such as war in Ukraine, slowing investment, and trade, fading of pent-up demand, and withdrawal of fiscal and monetary policy accommodation,” said a report by JM Financial.

This would mean that markets could remain volatile for two to three more months without steady cues from corporate earnings.

Apart from questions about GDP growth expectations, markets are also concerned that liquidity in general has been drying up. Surplus domestic liquidity has declined from 5.5% of bank deposits at the peak to 1.4% and is expected to fall to 0.6%.

“Receding liquidity has already caused a sharp correction in mid and small cap indices. While the actual fiscal slippage may not be as dramatic, the prospect of large fiscal slippage and monetary tightening forebodes rising rates scenario, which could temper hopes of private capex,” JM Financial said.

Benchmark index Nifty 50 has already crashed over 10% in the last six months.

Sectors vulnerable to earnings risk from potential growth slowdown:
(Source: JM Financial)

Markets have not factored in recession, slowdown and stagflation - fully
There are more macro factors that are coming into play.

“Apart from earnings, factors concerning the market are slowdown that has happened in the US and Europe, talks about recession, inflation across the world which means higher interest rates going ahead, oil still very high even after little correction,” said Baliga.

The World Bank has scaled down its global growth projection to 2.9% for 2022, which is nearly half of that in 2021 at 5.7%.

Further as major central banks continue to cut interest rates market will ‘accelerate capital outflows or restrained flows’ said analysts at JM Financial. There is the fear of stagflation — a regime of lowering interest rates combined with slow growth and unemployment.

“An assessment of multiple macro-market indicators suggests that among the conditions of cyclical inflections there are still significant gaps. Thus, we infer that the markets have not priced in the full impact of the ongoing tightening and prospective slowdown or recession,” said JM Financial.

$NIFTY50.NSE ANALYSIS ON A LARGER TIME FRAME : From a high of 18600 Nifty is now at 15,600. That's a fall of 3000 points from the high but if we look at it from low of 7500 we are still more than double of that and are showing outperformance in World's market as well. Indian economy has shown great strength towards global risks that we face thanks to strong consumption demand and growing middle class in India. So our view fundamentally is still very STRONG and these dips are very good buying opportunities for long term wealth creation. Technically also if we just see Retracement Levels from the Breakout Candle which made new high on Monthly Timeframe, we have retraced 50% of the gains and took strong support from 15000-15100 support areas. Going forward we are bullish on the Markets and would recommend to accumulate good quality stocks with strong performance and fundamentals or investing in NiftyBees is also a very good option. So STAY STRONG AND INVEST FOR FUTURE.

— (@Financialindependence) July 01, 2022

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