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Informist, Friday, Aug 2, 2024

By Alina Geogy

MUMBAI – India's benchmark indices could consolidate next week as investors are likely to refrain from taking aggressive bullish or bearish positions in the midst of a slew of corporate earnings announcements and rising risk aversion in global markets, at a time when domestic stock valuations are already expensive, according to analysts. Some caution is also expected ahead of the Reserve Bank of India's monetary policy review, the outcome of which will be detailed on Thursday.

One set of market participants believes Indian equities could continue to rise despite short bouts of volatility on account of expected interest rate cuts in the US, resilience of the domestic economy, and strong domestic institutional and retail inflows. Others, however, believe a deeper correction is overdue in the stock market, especially after recent gains, which have propelled the Nifty 50 and Sensex to levels never seen before. 

Today, the Nifty 50 and Sensex ended sharply lower with losses of over 1% each at 24717.70 points and 80981.95 points, respectively. Both indices snapped five-day winning streaks. Support for the Nifty 50 is seen at 24500 points while resistance is seen at 25100 points.

As stock valuations across sectors are seen to be expensive, analysts believe global cues will be significant for domestic equities in the coming days as they will determine the trend of inflows from foreign institutional investors. Equities across the globe are ending the week on a subdued note today, as fears of a deep slowdown in the US economy sparked risk-off trades. There are concerns that the US economy could be moving towards a recession after weak purchasing managers’ index figures and construction spending data released Thursday.

Following an unexpected rate hike by the Japanese central bank, there was some unwinding in commodities, which was followed by massive unwinding in the Asian markets, Arpan Shah, senior research analyst at Monarch Networth Capital, said. This was because of foreign institutional investors, who were borrowing from the Japanese market and using those funds to invest in commodities or other equity markets, he said.

Further, there was follow-up selling in the US market yesterday and the figures from the US are also showing weakness now, Shah said. So, "I'm expecting this profit-booking momentum to continue even from the current level," he said. 

Investors are also assessing the interest rate decisions by major central banks. The US Federal Reserve kept its key rates unchanged but hinted at a rate cut at its next meeting in September. On Thursday, the Bank of England cut its key interest rate for the first time in over four years, lowering its benchmark lending rate by 25 basis points to 5%. Earlier, on Wednesday, the Bank of Japan raised its overnight call rate to 0.25% from a range of 0-0.1%.

Back home, investors await the Reserve Bank of India's monetary policy meeting, due next week, for the central bank's decision on interest rates and the policy stance. Analysts said the RBI would not cut rates anytime soon until inflation was brought to and maintained at the 4% target.

Interest rates being trimmed is always positive for the equity market, Bhavesh Chauhan, head of research at Aditya Birla Money, said. There are high chances of a rate cut by the Fed in September and rate cuts would speed up if recession comes, he said. If the US goes ahead with rate cuts, monetary authorities around the globe would be likely to follow suit, he said.

Historically, August is muted or negative, and it is difficult to say to what extent the Nifty 50 will fall, but it is expected to fall around 2% from current levels, Shah of Monarch Networth Capital said. Yet, many retail traders may call the 2% fall a sharp correction, without factoring in the sharp rise seen in the past two months, he said. “It's just that people are not used to seeing a downside market, that is the only problem,” he said. 

Many analysts were of the view that there isn't a reason to worry about the losses in the market today as it was merely a breather after the record highs seen this week. Chauhan of Aditya Birla Money asserted that there was no "fall" in the market today. "While the Nifty (50) is down by, let's say, 200-odd points, the mid- and small-cap (indices) should fall far more," he said. But they are actually holding up, which indicates that the market is very strong, he said.

The combination of political stability, strong corporate balance sheets, and unprecedented earnings growth in the country are strong reasons why the Indian equity market deserves a premium to what it was valued at in past years, Chauhan said. Valuation-wise, there are no problems for large-cap stocks, as they have some steam left, but there are sections in the small-caps where valuations are overheated, he said. 

Analysts expect buying momentum to continue in sectors such as pharmaceuticals, health care, and fast-moving consumer goods. These are defensive sectors and may provide some risk mitigation in the face of an upcoming deeper correction, analysts said. On the other hand, information technology, automobile, and real estate stocks are expected to extend their losses in the upcoming sessions, they said.  End

Edited by Rajeev Pai

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