Kya se Kya Ho Gaya: What happened to the famous India Story
This was the state of our market last Feb:
- Nifty was trading near 8800-9000 range.
- 1 USD = 62 INR
But see how Nifty has declined over last 12 months: a decline of 22%.
Everything was going so well just last Feb for India. Crude had come down from $105 to $60. India was supposed to be a big beneficiary of this Global development but then what happened and why we are in such mess today. Here's the story of that journey:
THE CHINA FACTOR during 1H CY 2015
Around last Budget, when every India watcher was focused on India - people missed the big bullish move that was happening in China for purely different reasons. This was the state of Chinese Shanghai Composite index as of Feb 2015. A big rally had already happened without much noise
This Outperformance in Chinese market resulted in trade called: Avoid India Buy China
Why Chinese stocks had surged then?: It was believed then that 2015 is going to be the year of integration of Chinese Financial markets with the Global economy and considering how poorly Chinese stocks are represented in global indices, there was an anticipation of major change and hence, people started buying Chinese stocks like crazy. It became a no brainer trade for Chinese junta and also institutional money managers. 2015 was turning out to be Year of monkey
The China rally became mega rally in following 3-4 months. MSCI was expected to make a major decision on June 10 and the rally just went out of hand. The upmove was vertical. See the chart below of Chinese Shanghai Composite index
On other hand, Indian policy makers had nothing new to offer and were banking on the same old narrative which failed to excite investors. That's not all - to make matters worse - a needless controversy was raised aroud MAT on FIIs by India's Finance Minister. Nifty started underperforming
Buy China Avoid India trade was becoming mainstream around June 2015 and then came MSCI decision: "No changes can be done now. More reforms required in China". The news triggered profit taking in China and interestingly Indian market made bottom on the same day. It was such a text book kind of move. Here's Nifty chart of that period
The trade reversed dramatically. It became SELL CHINA BUY INDIA. Chinese market went into free fall and once again people started asking serious question on fundamentals and Chinese economy. The Chinese markets went in free fall mode
As this was happening: something else market participants started noticing in India: The Return of Indian retail investors and DIIs were now becoming as big players as FIIs. The confidence could be seen in the way Mid-caps started outperforming. It looked like the control of Indian stock market moved firmly in hands on Indian locals. Just FYI...Indian Mutual funds have put in Rs. 76000 crores in Indian stocks in last 12 months. FIIs have net sold Rs. 16000 crores in last 12 months.
The New Trend: Indians putting in lots of money in mid-caps. Nifty underperformed because of FIIs positioning. Nobody was complaining. Just when everything was looking great
Well: The China Factor re-surfaced again in August 2015
China stunned the world’s financial markets by devaluing its currency sharply. Reason: Deteriorating fundamentals and sharp fall in exports.
It did hit Indian market sharply and Nifty and many stocks went in for free fall during the middle of August and early September timeframe. There was Gap down selling which resulted in sell off in Nifty to 7500. Nifty bottomed around 8th September
But then Indian markets picked up again. Nifty rallied to 8350 to fill the gap. It then declined again and built a base at 7550. This phase - Nifty started underperforming more and focus was totally on midcaps. The party in midcap side of Indian stock market continued till the base of 7550 on Nifty was intact
Then came 2016: The rise of Global Volatility: China, Crude, Negative Interest rates, US recession - Bad News everywhere
Nifty broke 7550 and with it - the panic emerged and spread to midcaps. The sell off became brutal especially in midcaps. Nifty broke below 7550, pulled back to 7550 and retested it as resistance and sold off again. Everybody is now talking about Bear market without realizing large part of damage has already been done
Well we are back to Feb. But this is Feb 2016. Things are looking bad fundamentally but remember markets have priced in the bad scenario. Nifty is now standing at Ultimate support level and it needs to be seen what's in store for us next 12 months.
There is nothing to fear now but fear itself
My feeling: Nifty is at make or break level and this Budget can either push it down to total chaos or provide a new life that can re-start fresh Bull market. Ab jo hoga woh to waqt bataayega.
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Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers