Share Market Today - 16th July 2019

Is Equity Boom Nearing Completion ….!!Thesis: Flattening of yield curves is usually a lead indicator of things not working well. Historical weight of evidence reflects; whenever this has happened it was succeeded by economic downturn and meaningful correction in equities. Let’s examine this periodically: In the context of flattening/inversion of US Bonds yield curves and subsequent correctionsFlattening/ then inversion of US bond yield curves started in March 1997 and got completed by October 1998. S&P 500 peaked in July 1998. It corrected around 28.50%. Time frame of this correction was. There was a time lag of around 15 months when equities gave in and it lasted for a mere 2 ½ months. Correction in broader market started 3 months earlier. Russell 2000 started correcting in April 1998 and over by 1st week of October 1998. It corrected around 37%. Economic trouble was flagged by South East Asian currency crisis and got concluded by LTCM crisis. S&P 500 EPS was on a downward growth trajectory which turned negative in Q4CY1998 before returning to black from Q1CY1999. To, conclude flattening of yield curves followed by inversion, then broader equity market giving in & eventually large caps while earnings growth trajectory was on deceleration mode. Refer, Exhibit 1 & 2.Around late September 1999 narrowing and flattening of bond yields resurfaced, eventually turning into inversion by March 2000. S&P 500 topped out in 1st week of March 2000. It corrected around 49% before bottoming out in October 2002, broader market counterpart Russell 2000 corrected around 46% in the said period. US equity market correction came in after a lag of 5 months this time around. Deceleration in earnings growth happened from Q1CY2000 and it turned upwards in Q1CY2002. What is evident from the charts is bond yields bottomed out by June 2003. This was an era of DOT COM Bubble bust. Please, refer Exhibit 3 & 4.Bond yield started narrowing around October/November 2005, where short term yields rose much faster than long term counterparts. In 2006, yield curve was inverted. Fed Fund target rate stalled at 5.25 from June 2006 to June 2007, thereafter it rate cut cycle commenced before halting at low of 0.25 in December 2008. In period from April 2004 to June 2006 S&P 500 rallied around 14.72% and from there till top in October 2007 it advanced up 24%, summing up the entire move S&P 500 notched up 42.36% from April 2004 to market top in October 2007. US subprime crisis was now a household topic. Again a time lag of 2 years is being observed in equity correction and flattening of bond yields. Remarkably S&P 500 EPS growth started decelerating post Q1CY2004 while in absolute terms it d-grew from Q3CY2007 eventually bottoming out in Q3CY2009. Whilst; US equities bottomed out in 1st week of March 2009 earnings turnaround happened two quarters later. Next few years was marked by liquidity pumping by Central Banks across the globe. US Federal Reserve kept its fund target rate of 0.25 till September 2015. Please, refer Exhibit 5 & 6.An Era of infused liquidity & stabilising economies. Is it ‘LIQUIDITY BOOM’!! Post bottoming out in March 2009 S&P 500 and has been notching higher highs. US equities along with Indian equities are in 10 years of continued Bull Run. Broader market representative Russell 2000 has been underperforming since September 2018. Russell 2000 is down around (-10%) in the said period while S&P 500 has gained around 3% and bond yield curve is inverted. Let’s examine earnings and valuation multiples a bit closely. Most significant being corporate tax rate cut effective January 2018. It was brought down to 21% from 35%. A back of the envelope calculation shows S&P 500 EPS grew by mere 1.8% in 2018 over 2017, if we adjust the tax rates based on 2017 ( On reported basis it stands at 23.80%). Effectively the boost in earnings of 2018 was primarily on account of tax cuts. Whilst, S&P 500 is up around 12% since December 2017 and Russell 2000 is up around 17.09%. Please refer Exhibit 7, 8, 9 & 10. Taking a closure look at this PE table, S&P 500 traded at a PER of 22.31 at 31st December 2017 which is close to +2 std deviation from mean of 17.85x. Now if we adjust the earnings of 2018 as per earlier tax structure, then it is trading at a PER of 23.90x on ttm basis. From 2012 onwards (last 7 years) for S&P 500 revenue grew at a Cagr of 3.71%, Ebidta 4.79%, earnings 7.41% (if adjusted for tax rate in 2018 earnings cagr would be 3.95%), cash and cash equivalent at 5.73% , other assets at 3.84% while the index has delivered around 10% cagr respectively. Clearly, companies in US are finding it difficult to redeploy cash generation through businesses in business, in fact balance sheet statistics suggests cash is either used treasury operation or given back to investors through dividend and other corporate actions. Please, refer Exhibit 11. What’s Brewing Flattening/inversion of bond yield curve, on back drop of faltering economy. There is always a time lag in commencement of equity correction. Probability of Federal Reserve cutting benchmark lending rates. Broader market has been underperforming significantly. Historical weights of evidence suggest, narrow bull market has never thrived. Nifty 50 has been trading at higher end of valuation multiple. Last occasion when Nifty traded at such lofty valuations was in 2007, just before the great financial meltdown Low earnings growth. Narrowness of the market a cause of worry. Midcap and small cap significantly underperforming large caps. The Difference: While market was peaking in 2007/2008 it was rallying on high earnings growth (from 2003/04 to 2007/08 Nifty 50 earnings reported Cagr of 26.50%) with expectation that it will continue in foreseeable future. This time around it has been low earnings growth (Earnings Cagr of Nifty 50 from 2012 onwards has been around 3.88%) Expectation being earnings turnaround is round the corner. Nifty 50 Index has grown at a CAGR of around 10.50% from 2012 to 2019. Refer, Exhibit 14, 15, 16 & 17. The Comparison: In the Bull Run of 2003 to 2007 earnings Cagr of equities was higher than their respective indices. Refer Exhibit 18. Whilst, in the Bull Run from 2012 till now the earnings Cagr of equities is far lower than their respective index Cagr. Refer Exhibit 19. World has been consistently revising Global GDP growth downwards, from earlier estimated expectation of 3.7% made in Jan’18 for CY19 has been revised downward to 3.3% as reported in their April update. Gold has rallied over 20% in past 9 months, bonds are rallying. It is a scenario where all asset class is firing be it Equity, Bonds or Gold. Refer Exhibit 20. All-time low of 10 Yr US bond yields is around 1.37, which is still quite a distance (around 30%) from current level of around 2.04. In November 2018 US10Yr Bond Yield made a high of 3.23% from where it corrected to lows of 1.95%, it is now trading at 2.04. In the corresponding period S&P 500 has gained around 6.50% while Gold went up by 17.54%. Fasten Seats Belts: Turbulence may be round the corner All asset class performing be it Gold, Bonds or Equities. Dismal earnings growth across global be it US, Europe, China or India. Equities breadth getting narrower. Be it US equities or back home, mid/small cap stocks have been marked underperformer. In US S&P 500 is treading at all-time highs; while their broader market counterpart Russell 2000 is down 10.60% from its all-time high (August 2018), since then it has been an underperformer vis-à-vis S&P 500 ( during the same period S&P 500 gained 3.20%). Bench mark interest rates across the globe at record low levels. Despite prolonged low interest rate regime in significant economies of the world demand driven economic pickup is absent. In the event of correction and subsequent reversion to mean PER S&P 500’s may fall 10%. For Nifty 50 the correction may be even deeper. Seems like global Equity Rally from 2012 onwards is ‘Liquidity Propelled rather than Earnings driven’. INSL, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. This information is subject to change, as per applicable law, without any prior notice. INSL reserves the right to make modifications and alternations to this statement, as may be required, from time to time. Research Analyst has not served as an officer, director or employee of Subject Company One year Price history of the daily closing price of the securities covered in this note is available at www.nseindia.com and www.economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choose name of company in the list browse companies and select 1 year in icon YTD in the price chart)   IndiaNivesh Securities LimitedResearch Analyst SEBI Registration No. INH000000511Corporate Office: Lodha Supremus, 17th Floor, Senapati Bapat Marg, Lower Parel (West), Mumbai - 400 013. Registered Office: 601 & 602, Sukh Sagar, N. S. Patkar Marg, Girgaum Chowpatty, Mumbai - 400 007.Tel (Board): 022 6240 6240 | Fax: 022 6240 6241e-mail: research@indianivesh.in | Website: www.indianivesh.in )

The domestic market maintained its upside journey in line with our view but the upside was more of a grind rather than a swift move. The index Nifty sneaked above 11700 during the first half but closed below the same with decent gains. On the other hand, Nifty Bank displayed greater strength to close the session with a surge of around 160 points.For the second consecutive session, we witnessed a negative market breadth despite the positive closing. This displays that the internal strength of the market is still not up to the mark. On the sectoral front, the NIFTY AUTO (-1.02%) and NIFTY PHARMA (-0.21%) were the only group of stocks which ended with some loss. Among the list of gainers NIFTY PSUBANK (+1.12%) and NIFTY FMCG (+0.84%) were the top performers. From the F&O space, DHFL (+15.12%), EQUITAS (+6.26%) and MCX (+5.50%) outperformed others.As discussed in the previous edition of Nivesh Overview, we expected to 11680 – 11700 to act as a hurdle for the index. Yesterday, Nifty failed to sustain above 11700 mark. However, we maintain our stance that there could be more upside towards the gap area of 11750. There, one needs to start booking profits and wait for further confirmation to go long.On the downside, 11650 - 11600 are likely to act as support as per the intraday charts as well as options data. Traders are advised to keep holding the recommended 11600 CE options (July Month) which is trading around 115. We maintain our target of 180 in that with a stop below 25.Disclaimer)