Resilient show of Equities to continueAug 30, 2018(19:04)
Equity markets displayed a great deal of resilience during the week amid concerns over US Fed rate hike, terror attacks in France and Mali. While, news flow over a possible extension of stimulus package by ECB, Japan falling into recession, ongoing efforts by Chinese policy makers to put the economy on high growth path, slump in commodities and strengthening US dollar added to the volatility.
Slow and steady rate hikes boon for equities: Global equity markets seems to be prepared for a possible rate hike by the US Fed in December 2015 or in January 2016 reflecting confidence that the US economic growth is durable as indicated by the housing and labour market data. Equities have gained sharply with S&P500 gaining over 3.3% during the week unlike in the previous months when any indication of a rate hike led to sell-off in the equity market, thus displaying resilience. Historically, equity markets had performed well during the phase of a slow and steady rate hike and Fed’s assurance of a slow and steady rate hike also augurs well in that context, rather than in a faster rate hike cycle.
Fast track reforms post the Bihar debacle good for equities: Domestic markets also displayed resilience with the Nifty gaining over 1.2% during the week. The concerns over the change of course by the NDA government in the form of slowdown in reforms and tilting towards populist measures post the Bihar election results also eased after the announcement of FDI norms in 15 sectors. This has kick-started disinvestment process and is working towards simplifying the corporate tax structure. On the other hand, fresh concerns emerged after a poor show in macro data and seventh pay commission report, which could further delay any rate cuts by RBI. The government has announced the road map for bringing down the corporate tax rate to 25% in the next four years from the current 30% along with phasing out exemptions and deductions in order to simplify the tax structure. Mixed cues from macro data: IIP grew by 3.6% in September which was lower than 6.3% recorded in August 2015. CPI inflation had seen an uptick to 5% in October from 4.41% in September mainly due to spike in prices of Pulses and Onions due to erratic weather conditions and hoarding by the middlemen, while WPI continued to be in deflation. Trade data continued to be in the negative territory in October, with both exports and imports showing a negative growth of 17.5% and 21.2% respectively, mainly due to sharp drop in crude oil prices. The seventh pay commission report is akin to a twin edged sword as the proposed hike of 23.55% in salaries, allowances & pensions is expected to stoke demand in consumer goods and automobile sector on one hand, but it is expected to increase the bill for the government by over Rs 1.02 lakh crore. This is likely to increase the fiscal deficit by 0.65% of GDP in FY17.
DII’s continue to provide support and FII’s likely to turn net buyers: During the week FII remained net sellers to the tune of Rs 2,750 cr in the equity market however the selling amount has reduced gradually towards the weekend. On the other hand, FII’s remained net buyers to the tune of Rs 4914 cr in the derivatives market implying that they could turn net buyers in the cash segment in the coming days. DII’s continue to provide buying support at lower levels, with a cumulative buying of Rs 3048 cr during the week.
Too much sugar may not be good for long term financial health: Sector specific, sugar industry was the star performer during the week aided by an uptick in the global sugar prices along with a falling rupee. However, the rally is unlikely to extend for longer time as the government may not be in a position to handle spike in sugar price, after the political uproar for spike in prices of pulses, onions and tomato. Stock specific action was seen in sectors like Gas transportation, Infrastructure, Power, BFSI, Pharma and Consumer Goods.
F&O expiry and parliament winter session to set the direction: For the coming week, markets are likely to be volatile ahead of F&O expiry while, Indian stock market is closed on November 25th, 2015 for celebrating Gurunanak Jayanti. The proceedings of the winter session of parliament scheduled on November 26th, 2015 are carefully watched by the market for any cues on passage of critical bills. For the coming week, Nifty is expected to remain volatile between 7700-8000 with a positive bias.
Overall, with the US economy is on a stable growth path and the Indian government’s resolve to fast track the reform process leaving behind the Bihar debacle, with DII’s providing the cushion and FII’s expected to turn net buyers, Indian equity market is expected to outperform. Any declines in the broader market are likely to provide good entry opportunity in good quality front-line stocks for fresh investment. Based on the above factors we are of the opinion that the resilient show of equities will continue.