While the long awaited market correction is underway for the last 126 days, foreign brokerage Jefferies expects Nifty to bottom out before February 7, assuming there is no tax-surprise in the Union Budget 2025. It sees rate-sensitive stocks to do well in the expected near-term rally. Jefferies said the recent correction was the second longest of the 10 corrections in the last 10 years. At 15 per cent, the current correction is in line with the average corrections, it said.
"Nifty is currently trading at 18.8 times 1-year forward PE, which is still 3-4 per cent above its 10-year average. On a yield gap basis (Bond yield - Earnings yield) valuation is now at 10-year average (145 bps). Historically, this has been a strong indicator of future returns. Historical analysis suggests that Nifty has delivered 6 percentage points higher returns on a 12-month view, if bought below average yield gap of 145 bps, Jefferies said.
10 corrections in 10 years Jefferies said the domestic stock markets have corrected 10 times in the past 10 years. It categorised a 10 per cent drawdown in Nifty as a correction. Nifty Index has corrected by 15 per cent in dollar terms currently. In the past decade, on average it has corrected by 18 per cent and then bottomed out.
"Ex-Covid, the highest correction has been 22 per cent and the lowest being 11 per cent. Markets have now been in the correction mode for 126 days (2nd longest) which came after a 2nd longest rally for 548 days from March 2023," it said.
What after the near-term market bounce?
Jefferies said an increase in equity supply may limit market returns. In the second half of 2024, strong domestic flows were offset by a surge in equity supply, exceeding $7 billion per month. "Once the market bounces (expected) from the lows, equity supply should increase again - capping the returns. Low trailing returns create the risk of domestic flow slowdown. With trailing returns down to 7.5 per cent on a 12-month basis, and if the market moves sideways over the next few months, it could potentially slow down domestic inflows," Jefferies warned.
Jefferies said 9 times out of 10 times in the past decade, Nifty corrected alongside the MSCI Emerging market Index suggesting high global linkages. "The MSCI EM Index corrected by 12 per cent from October 2024 peak to January bottom but the index is already up 5 per cent from the January bottom as the dollar has also turned. This should be a lead indicator for India to also bottom sooner," Jefferies said.
"While the DXY has come off, coinciding with the MSCI EM Index bottoming, INR outlook remains weak. We note that the INR has been a strong currency on a REER / NEER basis and a further 3-4 per cent depreciation is possible and also likely, especially if RBI adopts a pro-growth stance and undertakes liquidity infusion measures. Outlook can change materially to the positive, if DXY traces back to the Sep-24 level," Jefferies said.