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Informist, Friday, Aug 16, 2024

By Anjali Singh

MUMBAI – Domestic indices are expected to extend their gains in the coming week amid easing concerns of a likely recession in the US and a further rise in information technology stocks, analysts said. While there are expectations that the market will rise further, concerns about frothy valuations persist. Investors await the minutes of the US Federal Open Market Committee's July meeting, due Wednesday, as it may shed some light on potential rate cuts in its September meeting.

Shares of IT companies are expected to rise next week after several economic data points from the US this week have eased fears around a potential recession in the world's biggest economy. Robust retail sales data for July and a fall in the weekly unemployment claims supported indices in the US on Thursday, with global indices rising subsequently. IT companies are in focus amid discussions of interest-rate cuts as a major chunk of their revenue comes from the US. The Nifty IT index closed 2.9% higher today, with its constituents, Wipro and Tech Mahindra closing around 4% higher today. On a similar note, pharmaceutical stocks are also expected to rise more owing to the exposure of these companies to the US market.

"The recent numbers in the US were good and there is comfort there because of it," Anita Gandhi, director at Arihant Capital Markets, said. "Global markets performed well today too. This will help the Indian markets unless any negative news from the Middle East comes up." 

The US retail sales in July increased 1% on year, significantly higher than estimates of a 0.3% rise by Reuters. Further, initial unemployment claims for the week ended Saturday fell 7,000 to 227,000 claims against the expectations of a slight rise in unemployment claims. The previous week's figure was revised up by 1,000 to 234,000 claims. After the data, the probability of a 50-basis-point rate cut is 31.5%, lower than the 54.5% probability seen on Wednesday, according to CME FedWatch Tool. The probability of 25-bps rate cut is seen at 68.5%. Federal Reserve Chair Jerome Powell is scheduled to give a speech next week at the Kansas City Fed's annual economic symposium in Jackson Hole, Wyoming. This is also expected to lend cues on the US rate cut trajectory.

The direction of the US Fed is clear, Ambrish Agarwal, director at Eastern Financiers, said. Agarwal expects a "short-term top" after the US Fed cuts rates but is not expecting the Nifty 50 to reach 25000 points. There are expectations of negative market breadth amid high valuations, Agarwal said.

Arihant Capital's Gandhi also said the valuations may be a concern for the foreign institutional investors, who have turned net sellers this month. A part of the reason for their selling was also the appreciation in the yen, which pushed investors to unwind their trades. So far in August, FIIs net sold over 212 bln rupees worth of equities after being net buyers in June and July, as per National Securities Depository data. 

"The Indian market has become even more overheated in the past few months, with strong performance across caps and sectors," Kotak Institutional Equities said in a report. On the valuation front, Kotak highlighted that in the past 2–3 months, there has been decent performance in the sectors such as banks and IT services, which drove the performance of headline indices. Further, there has also been strong performance in the "hot" sectors such as capital goods, defence, electronics manufacturing services, electric utilities, railways, real estate, renewables and state-owned companies. Many shares of state-owned companies have risen 25-50% in the past three months, after very strong returns in the previous 12 months, Kotak said.

Despite valuation concerns, analysts are positive about India's long-term prospects. "... although short-term risks may grab attention, they also offer strategic opportunities for astute investors to strengthen their long-term portfolios. With India's growth story firmly on track, we remain positive about the market's outlook for the future," Krishna Appala, senior research analyst at Capitalmind Research said in a note.

On Tuesday, Reliance Industries will hold its annual general meeting and market participants will await any announcements related to the initial public offering of Reliance Jio. This will be a major trigger for the sector, a research analyst at a domestic brokerage firm said. Reliance Jio's market capitalisation is expected to be either around that of Bharti Airtel or more than that, the analyst said. Bharti Airtel ended today's session with a market capitalisation of 9.026 trln rupees.

Today, the Nifty 50 and Sensex closed 1.7% higher each at 24541.15 points and 80436.84 points, respectively. The 50-stock index is expected to find support at 24350 points and face resistance at 24750 points.  End

Edited by Tanima Banerjee

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