INDIAN

STOCK MARKET
2017 OUTLOOK

Report By:
Raghav Behani
(SEBI REGISTERED RESEARCH ANALYST)

Dear Fellow Investor,

We at DalalStreetBulls wish you a prosperous and happy new year
2017. We also thank you for devoting your valuable time to this
report of ours. We sincerely hope that this report is of genuine use
to you. We have tried our best to keep the report simple and avoid
technical jargon.

Stock Markets have always been and will always be volatile. By
saying that a volatile year lies ahead of us, we will just be playing
smart with words and telling you something of no value. So first of
all, lets accept that this year, like every other year will be extremely
volatile and full of surprises. The market is full of opportunities and
you just need to be there at the right time and the right place with
the right mindset to make money. Sadly, we are in a time where 3
months is considered long term, uniformed buying and selling
happens based on no research and because of the raging 2013-2015
bull market, people think they have found the holy grail. Lets hope
that sense prevails in 2017 and the times to come.

At DalalStreetBulls we have always emphasized on solid research and
simple advice to make money by investing. Taking our idea ahead,
we feel proud to announce that we are now a SEBI Registered
Research Analyst (In the name of our founder Raghav Behani). We
are now a FULL TIME organization involved in independent equity
research. In an era where your broker wants you to trade intraday
for his brokerage earnings and where your mutual fund agent sells
you the fund that pays him the highest commission, we strive to be
your TRUSTED advisor for all your portfolio management needs.


DalalStreetBulls Solid Research. Simple Advice.

Once again, thank you for reading this report and we hope that it
benefits you!

Happy Investing,
DalalStreetBulls

A one-page recap of 2016:

Detail 31st December, 30th December, YoY Change
2015 2016
NIFTY 7,946 8,185 3%
NIFTY PE 21.49 22.12
NIFTY EPS 369.75 370 NIL
NIFTY 500 6,724 6,982 3.83%
NIFTY500 PE 23.60 25.25
NIFTY500 EPS 284.91 276.51 -2.81%
MIDCAP 50 3,415 3,662 7.23%
MIDCAP50 PE 21.84 32.65
MIDCAP50 EPS 156 112.15 -26.92%

Summary of the above data:

- Earnings have not grown
- Valuations are still high
- Markets have not given good returns in 2016

If we ignore Nifty and look at the broader markets, then the
superstars of the past 3 years The Mid and Smallcaps have also
largely underperformed. Some famous multi-baggers have seen
negative returns and earnings have contracted drastically in this
space. The valuations are still very high for any value investing in this
space. This is totally a traders market for immediate returns;
patience will reward the investor who is playing smart by
dynamically balancing his portfolio.

2016 is behind us now. 2017 has come in with mixed feelings. Some
say GDP growth will fall by 3% while some argue nothing drastic will
happen. So what do we, as investors, do in 2017? This report is for
everyone who is wondering the same! Lets have a point by point
discussion on different topics.

 i) GDP Growth Rate:

- Ranging from 3% fall in growth rate to 0.25% minimal impact,
we have read all types of imagination of different experts.
What really will happen? Who knows? There is no historical
data to draw comparisons with!
- The fact is that the markets have already discounted a fall in
growth rate. Everyone knows that there will be a hit for 2
quarters on the magical GDP figure.
- GDP growth rate falling wont really trigger a sell off, infact, if
the growth rate doesnt slow down to the extent expected then
we can see a sharp rally.

ii) Interest Rates:

- FED or RBI? Well, FED will raise rates by 50 bps as widely
accepted and RBI will cut the rates by 50-75 bps as per our
thinking.
- We are nearing a bottom on the interest rate cuts. There is no
more room for 100-150 bps cuts. This impacts the debt funds
and their returns significantly.
- We were aggressively suggesting debt funds to our clients,
readers and investors as we strongly expected deep rate cuts in
the last 18 months.
- Apart from the above point, there will also be an impact of rate
cuts on banking, NBFC, housing finance and reality sector
stocks in general.

iii) Earnings:

- There will be a fall in earnings for the next 2 quarters due to
the demonetization drive and thus PE will be distorted
- As we mentioned in the GDP part of this article, positive
surprises will cause sharp rallies and negative points are
already being discounted by the market.
 - Earnings remain a big worry and one really needs to find
avenues where growth in earnings is coming.

iv) Valuations:

- Our biggest cause of concern. This is the reason why we played
out 2016 so defensively! More than 60% of our portfolio
remained parked in debt funds and the returns were a meagre
10.44%
- Valuations are a big test of patience. When you invest at high
levels, you feel good for a few months as markets rise fast
when they are expensive. Once valuations cool, you lose
money.
- This is the sole reason why we focus on portfolio allocation for
capital protection. If you are able to protect your capital, you
will definitely be able to make high returns in a 5-6 years
period.
- Nifty continues to trade at 21x and with earnings set to fall,
valuations will spike up to 23-24 levels again. These are not
good levels to invest. We have been repeating this for a year.
- Its better to be bored and protect capital rather than be
adventurous and lose money. Remember this pic from our
earlier reports?

 v) State Election Results:

- If you think that USA presidential election results were a non-
event, then wait for the results of the election results of those
states which go to polls this year.
- Expect business news channels to come up with various
theories on what will happen if who wins.
- From a business perspective, such events should not be taken
as a basis to invest on.
- The markets discount all the news and potential results way
before things happen.

vi) Crude Oil Prices:

- The end of 2016 saw a sharp rebound in crude prices globally
and coupled with a strong dollar we saw a rise in fuel prices in
India.
- If prices keep increasing in 2017, then fuel prices will increase
even more in India and put inflationary pressure on prices. This
will leave no room for interest rate cuts by RBI.

There are other factors like GST, Dollar and Geo political tension that
could significantly alter the direction of the markets.

So what will happen in 2017?

We had been telling throughout 2016 that upside is limited and we
expect a time-wise correction more than we expect a price
correction. We expected earnings to catch up. A year has passed by
and the markets are still where they were a year back! Thats a time-
wise correction. With earnings set to fall due to recent
developments, we expect some deeper price correction to set in
now. Our fair value for Nifty is somewhere close to 18x of current
earnings which works out to be 6,660. Thats close to 20% below
current levels and 30% below the all-time highs of Nifty. However,
that is our view of Nifty and that doesnt mean Nifty will tumble all
the way down to prove us right. There is one thing called expectation
and another thing called reality. The stock market fluctuates because
of the difference between expectations and reality. But positive
surprises could trigger sharp rallies and negative news wont really
end up cracking markets. Despite all the bad news pouring in, Nifty
refuses to correct! This shows the strength that exists in the broader
markets.

Those who have been following us must have realized by now that
we dont waste time on coming up with random figures in the name
of forecasts but wait patiently for data and back our ideas with deep
research for informed decision making.

We now move on to data to back our views. In the next page you will
see charts relating to Niftys PE, EPS, P/B and D/Y along with the
explanations of the same.

Nifty PE Chart (17 Years):

The above chart shows the PE range of Nifty since January 1999. The
average PE of Nifty is 18. To be straight forward, the lower the PE
level when you invest, the higher your returns are over the next 3 to
5 years. Investing at PE levels of 23-25+ means you are close to a
valuation top and there is no room for PE expansion.

At these levels, the bull market is driving everyone crazy and new
investors flock the market and drive the prices faster to new highs.
Investing at these levels usually means negative returns in the
following 3-5 years. At lower PE levels, the mood is bearish and no
one will touch equities even with a 50 feet long pole! Take into
perspective, we are at 22 PE levels and you are scared of missing out
a bull market. If the market were to fall to 6600 levels now, you will
wait for 6000 or even 5500 to start buying! Greed and fear are best
shown through the PE chart.

Nifty is at PE levels of 22 and there is no much room for higher PE
levels when earnings itself are not expanding. Now, market experts
will talk of forward PE. What is this forward PE that is used to justify
higher valuations? Read on..

Financial Year Nifty CMP Nifty EPS (Expected) Nifty PE (Aprx)
2016-17 8100 370 22
2017-18 8100 425 19
2018-19 8100 507 16

Experts will say Dont focus on current earnings, market move on
expected earnings. True; markets move on expectations of earnings
growth or contraction. The problem arises here. Every expert has a
different view on what the growth on earnings will be and in India,
experts assume a 15% growth in the current economic scenario. This
expectation has been there for the past 5 years and that pace of
growth never came except in the 2003-07 economic boom.

So the expert will tell you that current valuation is around 22 but
with a 15% growth expected, the Nifty is trading at forward PE of just
16! This is a very cheap valuation and we should be buying now.
True, a PE of 16 is one of the best times to buy good stocks but do
you think that 15% growth in earnings will come? This brings us to
the Nifty EPS data.

Nifty Earnings Per Share (17 Years):

The above chart shows stagnation in earnings since the end of 2013.
Valuations of 22 can be justified when we are seeing a growth of 15%
to 20%. But in the current scenario, we are only expecting that
growth will come. This expectation has kept the markets in high
valuation zone since 2014 except in Feb 2016, when we saw a
healthy correction in valuations. After the demonetization drive,
earnings will take a hit for two quarters; infact in the last week of
December 2016 itself, earnings have fallen from 380 to 370 levels.
But apart from this 2 quarter miss, we have an inherent belief that
earnings will start growing from FY 2018-19 or maybe even Q3 of FY
2017-18. However, this doesnt mean we dont buy equities at all. In
fact, this is where our Dynamic Portfolio Balancing approach
makes it possible to achieve our goal of capital protection and capital
appreciation. You keep shuffling between equities and debt.

Market rewards patience. You must have earned just 4% to 7%
returns in a financial year but atleast you didnt lose money. When
you shift to an equity oriented portfolio at lower valuation levels,
you can easily earn 25% - 30% p.a. type returns and thus in the long
run you end up making 15% - 18% - 20% p.a.

Nifty P/BV Chart (17 Years):

Nifty DY Chart (17 Years):

P/BV and DY (Dividend Yield) are not critical indicators. They only
help when scenarios are extreme, such as pre-2008 crash or the dot-
com boom era. With time, they are losing their value as dividends
are going out of favor due to tax reasons.

But Nifty is just 50 stocks! And everyone knows that in the first leg of
a bull market, the small and mid-caps out-perform the large caps.
Well, numbers dont lie. Lets have a look at the PE charts of other
indices:

Nifty Bank (3 Months):

Nifty Bank trades at PE levels of 27 and NPA issues have wiped out
earnings across banks! Credit growth is at all-time lows; how can
such valuations be justified?

Nifty 500 (3 Months):

Nifty 500 PE is above 25 too and earnings have stagnated. This is no
better than its elder brother Nifty 50!

Midcap Index (3 Months):

Very expensive. Already, we have seen a correction from 36+ PE
levels to 28 in the last 3 months but still it is not a good time to jump
into the midcap bandwagon.


We conclude by summarizing our views for 2017:

- Valuations are expensive; earnings are not growing
- Niftys fair value is 6700-7000 zone
- Investing now should only be done with atleast a 3-year horizon
- By end of 2017 or early 2018, earnings growth and GDP growth will
be strong
- Any significant correction in 2017 should be used to buy VERY
GOOD stocks
- Time to remain in debt funds and gradually shift to equities slowly
as valuations correct.


















Disclaimer: The above report has been prepared using publicly available data, we dont take any
responsibility for the accuracy of this data. Please conduct your own due diligence before taking
decisions based on the above report. Neither DalalStreetBulls nor Raghav Behani will be responsible
for any financial consequences arising from actions taken based on the content of this report.