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Good rain not that good for stocks, D-Street may have gone overboard

FOMC policy review, BoJ’s policy meet and the Brexit referendum are some of the key events that promise to give equity markets a tough time across the globe.

, ET Online|
Last Updated: Jun 10, 2016, 11.28 AM IST
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FOMC policy review, BoJ’s policy meet and the Brexit referendum are some of the key events that promise to give equity markets a tough time across the globe.
FOMC policy review, BoJ’s policy meet and the Brexit referendum are some of the key events that promise to give equity markets a tough time across the globe.
NEW DELHI: The Indian stock market might be bracing for a perfect storm later in June, which most experts claim could trigger a selloff across the globe.

While the domestic triggers remain strong for the short term, global events will dictate market trend in the days ahead.

The forthcoming FOMC policy review, Bank of Japan’s policy meet and the Brexit referendum in the UK are some of the key events that promise to give equity markets a tough time across the globe.

Indian stocks are among the most favoured in the emerging market space, and they have already priced in a lot of good news, such as a normal monsoon, acceleration in economic growth and bottoming out of earnings.

But when the market prices in too much of good, disappointments follow.

Earlier in the week, global brokerage firm Macquarie cut its December 2016 target for the benchmark Nifty index to 8,800 points from 9,200 amid concerns over high valuations.

There is euphoria among the market participants and this is evident from the fact that the index is now trading at a price-to-earnings (P/E) ratio, which is close to its highest in five years at 17.3 times.

In the past 15 years, it has been at this level only thrice - in the second half of FY08, FY11 and FY15. On all occasions, it ended with sharp corrections.

“We are in that perfect storm where markets are pricing in a few things such as acceleration in growth if the monsoon is good. The March quarter earnings season was positive and that has increased expectations that earnings have bottomed out,” Andrew Holland, CEO, Ambit Investment Advisors, said in an interview with ET Now.

“We are now trading at a PE of 17-18 times, which is factoring in a good monsoon. But going forward global factors will probably have a little bit of more say over the next few weeks with obviously the Brexit vote looming,” he added.

Latest data showed the economy was recovering, and the earnings downgrade cycle seems to have bottomed out.

There is too much emphasis on the monsoon rains and how it will impact GDP growth. The reality is there is a very low correlation between the two and market participants should not build too much into it, say analysts.

Monsoon has become an interesting topic for most traders. In most cases, good rainfall is being seen as something that would provide a huge impetus to not just the agriculture sector but the overall economy as well, and thus, to the market.

A data analysis since 1995-96 (the variation in rainfall compared with normal, agri sector growth and country's GDP growth) shows the correlation coefficient between GDP growth and rainfall is only 0.26.

“The correlation coefficient between GDP growth and rainfall at 0.26 is not that meaningful. Though the correlation between rainfall and agri growth is relatively higher at 0.61, it is 0.58 between growth in the agricultural sector and the overall economy,” Pankaj Sharma, Head of Equities, Equirus Securities, told ETMarkets.com.

This means though there is some transmission from good rainfall to growth in the agri economy and then from agri to the overall economy, the overall positive impact of good rainfall is not that much always.

"A case in point was 2013-14, which was a year of good rainfall. It saw 5 per cent excess rains and much above average agri growth, but resulted in a poor GDP growth number overall. Similarly, there have been years when rainfall was not great and still, the overall economy was growing fast e.g. 2004-05 and 2009-10," he said.
(What's moving Sensex and Nifty Track latest market news, stock tips and expert advice on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds.)
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