The stock market will be booming again in 4-5 months! Nifty will go up to 26,500; Fall in US bond yield and dollar index will become a big trigger

In recent weeks, there has been a relief and very positive report for the Indian stock market, which is struggling with the pressure of rapid selling by foreign institutional investors (FIIs), geopolitical tension in West Asia and retail inflation. According to Gaurav Bhandari, Chief Executive Officer (CEO) of financial research and brokerage firm Monarch Networth Capital (MNCL), the domestic stock market will see a strong re-bound within the next 4 to 5 months. On the basis of this new rise, the benchmark index Nifty 50 can jump by about 16 to 18 percent from the current levels and reach a new historical level of 26,000 to 26,500. Interest rates in the global economy, US bond yields and a possible U-turn in the direction of the dollar are going to open a new door of liquidity for the Indian markets.

The biggest reason for the recent selloff in global markets has been the unexpected rise in US Treasury yields. US 10-year bond yields rose to beyond 5.35 percent, the highest level in the last 24 years. When safe US government bonds start giving returns of more than 5%, foreign investors start pulling money out of emerging markets like India and investing it in safe US bonds.

However, experts clearly believe that the yield of 5.35% is not a ‘new normal’, rather it is a peak level which is damaging the American economy from within. America’s total public debt has crossed $35 trillion and the annual interest expense on it has reached $1.8 trillion, which the American government cannot afford in the long run. Real estate and consumer demand in the US is slowing as 30-year mortgage rates cross 7.03%. In such a situation, there is huge pressure on the US Federal Reserve and the Treasury Department to bring down interest rates and yields. As yields soften, global liquidity will immediately shift into risk-on mode and foreign capital inflows into countries with strong economies like India will rapidly return.

The second main basis for the rise in the stock market is the possible weakness in the US dollar. The global dominance of the dollar is coming under pressure due to America’s huge fiscal deficit and ever-increasing trade deficit.

The Dollar Index (DXY) has already fallen below the psychological level of 100 and is expected to slip further to the level of 95. Whenever the dollar index weakens, global fund managers reallocate their portfolios and move money out of dollar-denominated assets and diversify into emerging market equities. Due to weakening of dollar, Indian Rupee will strengthen, which will make import of crude oil cheaper, current account deficit (CAD) will reduce and input margins of companies will improve. These circumstances will directly give rise to a new round of foreign capital on Dalal Street.

There was aggressive selling by foreign investors in the Indian stock market during October and September, which saw outflows of over ₹45,000 crore in just six trading sessions. But the market was supported by the monthly SIPs of the country’s domestic institutional investors (DIIs) and retail investors, who completely absorbed the foreign selling.

Foreign investors are currently sitting on extremely ‘light’ (low exposure) and short positions in the Indian derivatives and cash markets. As soon as signs of relief from global bond yields and dollar index become apparent, FIIs will be forced to cut their short positions (Short Covering). This ‘double engine’ of continued buying by domestic mutual funds and withdrawal of foreign investors will provide enough ammunition to push Nifty straight to 26,000 and then 26,500 levels from the current range of 22,500-22,700.

According to market analysts, the recent correction has made the valuations of many leading large-cap stocks extremely attractive. At present the one-year forward PE (P/E Ratio) of Nifty has come in a reasonable range of around 18 to 19 times. India’s GDP growth rate remains strong around 7 percent and corporate earnings (earnings per share – EPS) are expected to grow by double digits in the coming quarters. When there is a confluence of earnings growth and liquidity, ‘multiple re-rating’ starts in the market. This re-rating may lead to an increase in the valuation of Nifty from 18 times to the historical peak of 22 to 24 times, which will lead to a direct increase in the level of the index.

In this possible rally of the next 4-5 months, not only the entire market will run, but selected sectors can give the biggest profits to the investors:

1. Banking and Financial Services: With interest rates peaking out and credit growth remaining strong, leading banks like HDFC Bank, ICICI Bank and SBI will lead the rally.

2. Capital Goods, Defense and Infrastructure: There will be strong momentum in L&T, BHEL and defense PSU stocks due to increase in government capital expenditure (Capex) and private investment.

3. Energy, Power and Renewables: Due to the continuously increasing demand for electricity and green energy expansion, companies like NTPC and Power Grid are generating strong cash flows.

4. Automobile and Consumer Discretionary: The auto and retail sectors will directly benefit from the improvement in rural demand and strong sales during the festive and wedding season.

Stock market experts say that the current market is not about crying recession or selling shares out of fear, but about preparing for the next bull-run. Whenever there is any global uncertainty or short-term decline in the markets, it is a golden opportunity to add companies with strong fundamentals to your portfolio at cheap prices. Investors should continue their regular SIPs in large-cap and diversified flexi-cap mutual funds instead of speculating in a single penny stock. As macro-economic conditions become favorable over the next 4 to 5 months, patient investors will directly benefit from robust wealth creation with a new Nifty peak of 26,500.