Last week, market touched the psychological mark of 12,000 and 40,000 for Nifty 50 and Sensex 30, respectively. It was led by measures announced by government for the realty sector to provide liquidity for stalled project, and strong cues about the progressive developments in the US-China trade deal. This was offset by some profit booking at the end of the week due to downgrade in India’s rating outlook to ‘negative’ from ‘stable’ by Moody’s. Rupee also weakened to a one-month low factoring the weak fiscal position of the government. Market turned watchful with a negative bias considering the key economic data to be announced next week.
We feel that in the near-term, the trend of the market will be dictated by macro releases. India’s CPI inflation is expected to be on the higher side due to rise in vegetable prices, which is above RBIs average forecast for FY20. But this is unlikely to change the accommodative monetary policy immediately. RBI may cut interest rate to support the weak economy but can develop a careful strategy for the future. Despite the festive season the IIP steeply declined by -4.3% YoY in September. This is likely to impact the actual GDP data of Q2, to be announced at the end of the month. Economists forecast it to be in the range of 4.2% to 4.7% from the actual 5% for Q1. For FY20, RBI had forecasted a growth of 6.1% which is likely to be downgraded further. In-terms of earnings growth, we notice that the strength of Q2 result slowed by the end of the season, and this can put pressure on stock performance. We expect hiccups from blue-chips in the short-term due to premium valuation.
Regarding the cut in rating by Moody’s, we don’t think that it will change the performance of equity market since it is based on outdated data which has already been factored in by the market. It may impact the bond market in the short-term. However, if the fiscal deficit issue gets expanded, it can spread to equity market in the future. But the probability of the same looks limited today as extra income from divestment, spectrum sales and dividend is likely to fix the fiscal deficit gap. IT, Pharma, export oriented stocks and gold may do well in the short-term. We also have a positive view on Insurance and AMC sectors given its early phase of business growth led by low penetration leading to healthy business outlook in the long-term.
Market is likely to be range bound as investors stand side-line from expensive large caps while mid and small caps may see interest but volatility will prevail. Continued poor performance from automobiles and fresh doubts over US-China trade deal may trigger a consolidation in the short term.
We had a target of 12,600 for Nifty 50 which we are maintaining. This is a good time to consider investing in quality mid and small caps which are available at reasonable valuation, as they can outperform in the long-term. Along with this its ownership by institutions reduced in the last two years while valuation of large caps is high. Such stocks will do well as economy improves and systematic risk reduces in the future. SIP or SWP will be a good method to increase your exposure in such stocks. The long-term investment scenario for equity has improved due to cut in corporate tax and expectation of supportive measures for equity market by the next budget. Economy has reached its worst and is likely to improve in a couple of quarters led by more reforms, government stimulus, improvement in global economy, good monsoon and cut in interest rates. Liquidity in the global market is also good which will support EM’s.
Posted: November 2019.