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5 Reasons The Indian Stock Market Rally May Fizzle Out

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The Nifty in the last two-days has rallied a solid 280 points. Unconfirmed reports that the government was considering withdrawal of tax surcharge on the super rich and also the fact long term capital gains tax maybe done away with, helped propelled the indices higher. However, it is clearly a sell on rallies market. Here are 5 reasons the stock market rally may fade:

Economic growth tepid
 

Economic growth tepid

Growth rates in the Indian economy have been rather tepid. Auto sales have declined sharply, while most other sectors are reeling. Weak demand can be seen across sectors, including Fast Moving Consumer Goods sector. Crisil has already lowered the GDP growth rate to 6.9 per cent for FY 2019-20, while IMF has also revised it downward to 7 per cent.

"The demand and investment slowdown, both put together, are having a dampening effect on growth. Whether it (the slowdown) is structural, cyclical or a momentary phase, that's an aspect which requires deeper analysis," RBI governor Shaktikanta said in a press conference recently.

Clearly, joblessness is also taking a toll and the Union Budget, led to some disappointment. Inflation too has remained very subdued and not many companies have the liberty of pricing power in the present conditions. This may lead to difficulty in boost for corporate earnings, which should put pressure on stocks.

Government spending to be hit by fiscal deficit

Government spending to be hit by fiscal deficit

Spending by the government is also likely to be hit, thanks to the fiscal deficit. This means demand would continue to be subdued. The real problem is also that private sector investment is not picking-up. Had that really not be an area of concern, we could have seen much better economic conditions.

Most analysts believe that the government may find it hard to maintain the fiscal deficit number for 2019-20. In any case, it is going to be challenging times for the government going ahead.

Valuations are too hefty
 

Valuations are too hefty

India continues to trade at a significant premium to peers. One can pay the premium in the stock markets, provided there is growth. Corporate numbers like Tata Steel, SBI, IndiaBulls Housing and scores of other Nifty companies has only disappointed.

When there is no growth, a premium cannot be justified. Hence, there is a possibility that we may see the markets either languishing at these levels or even lower.

Global market volatility

Global market volatility

Global markets have also been extremely volatile. The trade wars between the US and China is also likely to lower demand and lead to slower growth. Already, markets this week were rattled by fresh tariffs by the US on China and the latter in turn retaliating.

Sell on rallies

Sell on rallies

There has been some recovery in the global markets since the start of the week, however, one needs to exercise some caution and be careful.

The real right strategy now would be to sell the markets on every rally. When there is a slowdown, protection of capital and taking profits off the table, would not be a bad idea. The Nifty has already rallied close to 3 per cent from the lows and it maybe a good time to sell.

GoodReturns.in

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