Long-term targets for financial markets indices are how the average investor gauges the overall expected trend for the markets. But if we take a step back and think, do they make sense?
In my opinion, there are two ways of looking at it. I try to use both in my analyses (longer-term and shorter-term). Before I get into that, I feel that the movements we saw on Friday and Monday were pure euphoria and emotion-based ones. The global markets were not nearly as positive as they’d have to be to even justify the ludicrous price moves we saw these past two trading sessions. If FIs are to jump on the temporary euphoria train then it may not be ideal for regular people. More on this later.
Now, the corporate tax cut, based on my understanding, would not really have such a massive impact on the markets. Especially when we’re talking about auto & banking stocks. The tax cut does not affect the fundamental flaws and shortcomings of the economy, industry, and company. Paying fewer taxes might mean more money in the hands of businesses, but the impact on demand might not be that big. And as far as banks are concerned, loan payments are deducted before corporate tax calculations so the NPA issue is still very much present.
Coming to my views on this:
Longer-term view
When we’re talking about the global scenario, it’s definitely super volatile – no prizes for guessing that! Fundamental issues aside, there are a lot of technical resistances also that certain companies and indices are facing. That said, I feel a general target for indices is okay. I do not follow Sensex that much, but I know that Nifty is rebalanced quite frequently. In fact, IBULHSGFIN will soon make way for NESTLE. The rationale (or what I think is the rationale anyway) behind this is quite sound, IMO. NSE does not want the index to not perform YoY. It wants to pick stocks which will continue to have potential and grow.
If we look at the Quarterly, Half-yearly, and Yearly charts of Nifty, we can see that it’s been in an uptrend with higher highs and higher lows. I feel a lot of that is partly because of the rebalancing that’s done. Keeping that in mind, giving targets is not a “problem” because unless there is a major catastrophe we might see the trend continuing.
Investors need a yardstick and as long as the targets are moderately conservative (accounting for news-based events) it should not be a problem. What is a problem is just how indecisive these FIs seem to be. Revising targets so much goes to show how incomplete their analyses have been. With the resources they have at their disposal, one would expect a more accurate view even if it is more conservative, say Sensex at 40,000 instead of 45,000. Alternatively, they can give a range or general outlook. Now, I think they already do, but I’m going by what you’d mentioned in the post.
Moreover, tweets and other news-based factors might just correct themselves in 6-12 months time. If we look at Nifty’s D chart, we can see that there have been several gaps throughout its previous rallies which were later filled in. So while these factors would definitely impact the shorter-term trend, unless it’s a massive change such as embargoes and such, it may be corrected in due course.
Shorter-term view
This is what I’m personally a fan of and use. The thing is, for someone who mainly does swing, positional and intraday, I have to react to what the market is at that very moment. As I’m writing this post, Nifty is -37.65. And this is after the massive 1,000pt sprint. Had we not seen the sprint, investors who have a longer horizon might have panicked. For them, these longer targets are required. However, for someone like me, a longer time horizon helps give a general context, but it won’t help me make a decision.
Hence, publishing just shorter-term views may just increase panic in the markets. When investors know that the index is likely to appreciate by next year, they may not exit their position at a loss hastily. Conversely, if there is no confidence in longer-term appreciation or at least stability, the panic will lead to a lot of selling pressure in the market.
My take on all this
I’m personally okay with 6-12 month targets and projections. Not only because it gives investors some confidence, but also because (from what I can figure) it gives some context and backing to the futures and forwards markets. That said, what I do have an issue with is publishing only an optimistic or pessimistic number and adjusting it frequently. If this is done, it defeats the very purpose of publishing these targets in the first place. The thing is, anyone informed enough to know about the workings of the markets and the effects of certain events would have their own view. These targets are instead important for the common man who may not have an educated opinion or view about the markets and hence require a ballpark of what could happen in the coming months. If these ballpark estimates are revised so frequently, the average Joe might suffer.
What I feel might help is publishing a range based on the overall sentiment. A guide of sorts which any layman can understand. This way, they don’t really need to revise targets so often and they can genuinely help the people to whom these numbers actually matter.
I’d love to know more about your views on this!
P.S. pardon the self-plug here. I have a podcast related to the financial markets. I publish an episode every day. Do check it out. I’ve spoken a lot about the recent trading sessions in the past three or so episodes! Click here to listen 😀 It’s available on a ton of platforms including Spotify, Anchor, iTunes, Google Podcasts and more.
This article is a response to this LinkedIn post. Please read the post for additional context on what I will be talking about.