Nifty slid on the concern of Trump tantrum and over-valuation

·         At TTM Q2FY25 EPS around 877 (vs Q1 EPS 873) and 24000 levels, the current Nifty TTM PE is around 27, still in the overvaluation zone

·         Now US election is over, all focus may be now Trump’s comments and policy hint

·         Indian market will also closely watch the Maharashtra election, in which BJP/NDA is now expected to win with a slight lead contrary to earlier perceptions

·         Nifty may recover to some extent if Modi 3.0 indeed wins in Maharashtra and Jharkhand after the unexpected win in Haryana

·         But overall macro economy is under stress on competitive Dole money politics and political black money in India, boosting public deficit, debt, LCU devaluation and inflation

·         This is affecting discretionary consumer spending and corporate earnings; Nifty EPS may grow around 10% instead of 15% CAGR

India’s benchmark stock index, Nifty closed around 24148.20 Friday (8th November), slumped almost -0.64% for the week and almost -6.50% in the last two months (since 1st October) on the concern of Trump tantrum 2.0 and over/expensive valuation of Nifty; FIIs are still in selling mode. Although, most of the FIIs selling are being absorbed by DIIs, net retail sales are dragging the Dalal Street. Also, the overall report card of Q2FY25 so far has been subdued and at around 877 TTM EPS (Q2FY25) and 24000 levels, the current TTM PE of Nifty is around 27, still above normal bullish zone 25, but came down from the extreme bubble zone around 30, late September’24, when it scaled the life time high around 26300. The TTM Q2FY25 Nifty EPS was around 877 vs 873 in Q1FY25 and 855 in Q4FY24.

The overall sequential average growth in Nifty TTM EPS is now only around +1.00%; now even after considering +3.0% average sequential growth in Nifty TTM EPS for Q3FY25 and Q4FY25 (Festive season in Indian and abroad; higher consumer spending), the FY25 Nifty EPS may come around 930 (projected growth +8.75%) against our earlier estimate of 983 (projected growth +15%). At around 877 and 930 TTM and FY25 EPS and fair PE 22 (against average EPS growth of 12%), the current Nifty fair valuation may be around 19300 and 20500; but it may be tough for Nifty to maintain 10-15% EPS growth for the next few years until there is some policy support like RBI rate cuts, targeted fiscal stimulus and appropriate policy reform.

Overall, India’s Dalal Street (Nifty/Sensex) underperformed America’s Wall Street (DJ-30/SPX-500/NQ-100) in the last few weeks due to various factors:

·         Stretched/bubble valuation of the Indian market; almost double, especially against China and some other EMs

·         Increasing FII outflow and China’s gain/ India’s pain

·         But FIIs may be also liquidating/booking profit to fund various state elections in India for the ruling party BJP/Modi 3.0 as their elections are systematically vital for Modi/Shah & Co (Gujrat lobby), especially Maharashtra election for controlling corporate political funding, Mumbai being the financial capital of India.

·         Most of the FIIs are fronts of Indian HNIs/corporates/major political parties/politicians, and round-tripping black/unaccounted money to fund unofficial election expenses, which is huge in India, running into trillions of rupees.

·         Jharkhand is also a very important state for Indian political funding sources, being the mineral richest state; corporates like Adani have immense interest in political and policy control.

·         FIIs may be also liquidating to partly fund the US election (Republicans and Democrats)

·         Lingering geopolitical tensions, especially the recent vicious cycle of ‘war games’ between Israel and Iran, which may escalate into a full-fledged serious & real war

·         India is not only dependent on imported oil/fuel and food (to some extent), but also various Indian MNCs are quite dependent on the Middle East for various goods & services and FX remittances.

·         Gradual withdrawal of Yen carries trade.

·         Stagflation or even recession-like economic situation in EU/Germany and Canada

·         Trump 2.0 tantrum/trade war concern, potentially negative for China, and other top Asian/South American goods exporters like Japan, South Korea, Vietnam, Mexico, Brazil, and even Germany/EU/Various other European countries

·         India may be also highly vulnerable to Trump’s anti-immigration, protectionism, and other trade war rhetorics despite Modi-Trump ‘Bhai-Bhai’ (brotherly) relation and probable hefty contribution by India Inc. for the Trump election campaign directly or indirectly through proxies.

·         High probability of an imminent Economic slowdown in India, especially in urban areas, affected by increasingly sky-high cost of living and lack of adequate real wage growth for the general private sector workforce.

·         Increasing political & policy paralysis in Modi 3.0; if BJP/NDA loses in the forthcoming Maharashtra and Jharkhand elections, then it may bring more trouble for Modi; both these states are vital for political funding for political parties, very active in these states.

·         Indian market may not be enjoying further so-called EM scarcity and Modi's premium.

·         India may be heading for multi-party electoral democratic chaos (rainbow coalition politics) rather than two-party stable democracies at the Federal and state government levels; this will affect appropriate policies and priorities.

·         The increasing trend of Rabin Hood politics in India mainly relies on Helicopter Money to gain in electoral politics by almost all major political parties across the spectrum both at Federal and state government levels.

·         Although in most developed or even developing countries, there are some forms of social security mainly in the shape of unemployment benefits for a limited period with an emphasis on encouraging employees to find another work and move on

·         In India, there are no such unemployment benefit schemes and political parties indulge in ‘bribing’ voters at the bottom of the pyramid (BPL/APL/even lower middle class), providing cash or kind and free foods.

·         For example, the ruling/incumbent party/collation BJP/NDA has now indulged in huge dole money politics in Maharashtra for the last few months (ahead of the election on 20th November), running into trillions of rupees officially/unofficially in a do or die effort to win the vital election at any cost; bringing the state finance almost at the brink of bankruptcy.

·         The same (cash/kind for vote) is also going for elections in various other states and all major political parties are involved in such dole money electoral politics; all these are increasing public deficit, debt, and inflation.

·         Although Indian Federal and State governments are redistributing a portion of huge GST collection to the poorer section of the society in the form of direct benefit/cash transfer, rather than investing it for free & quality public education, healthcare (social infra) and also traditional infra and the overall economy to produce an environment of more job creation for masses, such fiscal stimulus is creating the vicious cycle of higher public deficit, higher public debt, increasing currency (LCU) devaluation and inflation.

·         Such freebees are also creating higher demand from an increasing population, especially for food items, which are constrained in supply, and thus food inflation is growing at an average of 10% or even more; i.e. over 50% in five years, affecting discretionary consumer spending; almost 90% of the average monthly income of a middle-class Indian goes for food, healthcare, housing and education.

·         India’s average wage growth of around 5% is much higher than productivity growth of around 2.5%, which is creating more inflation; wage growth for government and corporate employees is around 10%

·         Increasing regulatory tightening for retails by SEBI, India’s market regulator.

·         Still hawkish RBI; although RBI may start cutting rates from December’24, it may be delayed to April’25 (FY25), as RBI may not cut rates below 5.00% from present 6.50%; RBI may cut every alternate meeting in FY:25-26 @25 bps for a cumulative cut of 150 bps by Feb’27 (FY26)

·         Although India’s total CPI is still hovering around +5.0% on average, core CPI is now around +3.0%; RBI may not cut rates to +4.0% due to various reasons including the fact that lower interest/lower bond rate is negative for bank lending model (NII/NIM)  and banks have legacy issue of higher NPA.

·         Indian Federal government is the largest shareholder of PSU Banks, is not pressurizing or seeking lower borrowing costs like +4.00% longer term terminal repo rate against 2-3% core inflation rate (price stability targets) and 5.0-5.5% unemployment rate (as maximum employment mandate)

·         Comparatively very high borrowing costs (almost double digits for Indian households and businesses and even corporates) for decades after decades in India are affecting not only private demand/consumer spending but also private CAPEX and job creation.

·         Also, higher borrowing costs in India are not effective in limiting the overall demand of the economy as average wage growth is higher than labor productivity growth and a vast part of NFP (Non-Farm Payroll) employees (private/corporate/governments) has almost 10% of wage growths; all these are creating a spiral of wage inflation.

·         Also, widespread corruption at almost all levels, led by politicians is not only boosting India’s public debt but also general inflation.

Conclusions:

Looking ahead, after the US election, the focus of the Indian market is now on Trump’s comments and actual policies. However, the market is now assuming moderate Trump 2.0 compared to Trump 1.0 as Trump may take a lesson from his earlier experience (electoral political campaign promise and real-life administration are different. Also, Musk & Co (Corporate and industrial lobby) may keep Trump in check.

Domestically, India’s Dalal Street may now focus on Maharashtra and Jharkhand state elections, in which it now seems that BJP/NDA/Modi 3.0 is now leading with a slight edge over than INC/IND coalition contrary to earlier perceptions. BJP/Modi 3.0 is employing huge financial muscle along with Operation Lotus and other election tactics in Maharashtra, but it remains to be seen whether voters of Maharashtra vote for Helicopter Money or Marathi pride.

In any way, if BJP/NDA/Modi 3.0 manages to win in Maharashtra and Jharkhand after the unexpected win in Haryana, it will help Modi 3.0 to consolidate his position both in the party (BJP/RSS) and also overall public image after the ‘debacle’ in recent General election (June’24). In that scenario, expect some relief rally in Nifty from around 23500 levels; otherwise, expect 22500-22300 levels on Nifty in the coming days.

Technical trading levels: Nifty/India 50 Future/CFD

Whatever may be the fundamental narrative, technically Nifty Future/ India 50 CFD (24200) has to sustain over 24500 for any rebound to 24700/24900-25200/254450* and further rally to 25650/26000-26200/26500 and 26650*/26800-27000/27200* in the coming days; otherwise sustaining below 24450-24350, India 50 may further fall to 24050/23950*-23800*/23650-23450/23350 and further to 23000/22850-22500/22150 in the coming days.