Investors have become choosy and are investing only in high quality heavyweights, as the market is in a risk aversion mode. Momentum of the broader market is insufficient, as sector wise trend defines the overall stance of the market in short-term. This short-term momentum is based on themes like budget, global trade-war and volatility in oil prices. In the last two weeks the best performing sectors were banking, real-estate, infrastructure and consumer durables. A good portion of this sectoral movement is pre budget rally.
Today, domestic investors find limited opportunities in the equity market as economy is slowing down due to financial distress. Though India has done well with 12% return in Sensex30 and 6% in Sensex500 in the last one year, investing has become very tough. Nifty-Midcap is -3% and Nifty-Small caps is -13% while thousands of small and micro caps have tumbled down. Despite fall in prices, valuation remains at premium. On a trailing basis (12 month), Nifty50 P/E is 26x and Nifty500 is 28x which are at a five years’ high.
Global market, since the outbreak of trade war, has been volatile given the hard stance of the involved parties. Global market saw renewed hope last week, given a likely reconciliation between US and China who have agreed to hold off on new tariffs and renegotiate with a positive view to find a solution. US is likely to use the same trade tactics with Europe, threatening them of higher tariff post the G20 meet. India has increased tariffs on 28 American goods following the US hike in custom duty on metal exports and decision to end preferential benefits to Indian exports last month.
Domestic leading indicators continue to show signs of slowdown in the economy, domestic auto manufacturers have registered a sharp decline in volumes. Passenger vehicles sales de-grew by 17%, commercial by 12% and two wheelers by 6% respectively on a YoY basis in Q1FY20, showing more pain in the near to medium term. Further, late onset of monsoon has led to deficiency in rainfall in the country which is another risk in the making.
Investors hope that the government will initiate fiscal and monetary measures to revive the deteriorating economy. All eyes are on the budget, as this will be the first big opportunity for the government to showcase its ability to support the weakened economy and revive growth. The Union Budget 2019-20 could make or break the current market trend. There is limited scope for the budget to have big fiscal measures, rather than being an official document of financial statement with the courtesy to continue the measures announced in the interim budget. The financial forecast of tax collection is likely to be lowered and some dilution in fiscal target can be expected in the short-term. The focus is likely to be on agriculture, rural economy, water, manufacturing and infrastructure. In case if any extra measures are announced, they will depend on the non-budgetary resources planned by the government. In the meantime, on a positive note, OPEC and its allies have agreed to extend the production cuts for another 6-9 months in a recent meeting. Though, US sanctions on Iran and Venezuela have increased the volatility of oil prices, it has eased by 4$ to 62.5$ during the week.