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Informist, Monday, Aug 19, 2024

By Alina Geogy

MUMBAI – High valuations in select sectors and muted earnings growth for the June quarter are expected to weigh on investor sentiment in the upcoming session and offset somewhat the positive sentiment in anticipation of a rate cut by the US Federal Reserve. These factors may keep the domestic headline indices in a narrow range again Tuesday, analysts said.

Investors may also track positive cues from global markets, which have been gaining of late as fears of an impending recession in the US fade after robust economic data from the country. The fear of a slowdown in the US economy faded after a fall in the weekly unemployment claims for the latest week, which suggested continued strength in the labour market, and strong US retail sales data for July. The S&P 500 and Nasdaq Composite indices both ended higher for the seventh straight session Friday.

There was some fear of a slowdown in the US economy, but things are broadly okay now, Gaurav Misra, co-head of equity at Mirae Asset Global Investments, said. The Fed's rate reversal has to eventually happen, he said. There is a nearly 72% probability of a 25-basis-point rate cut by the Fed at its September meeting, according to the CME FedWatch tool.

While expectations of the Fed cutting rates at its September meeting are strong, some analysts also see a chance of the rates being kept unchanged. Investors will train their sights on the Fed's July meeting minutes, scheduled to be published Wednesday, and Fed Chair Jerome Powell's comments at a meeting later this week. Minutes of the US Federal Open Market Committee's July meeting may provide crucial hints about potential rate cuts at the FOMC's next meeting.

Insights from several Fed officials, including Powell, at the Kansas City Fed's annual economic symposium in Jackson Hole, Wyoming, are awaited later this week. The Jackson Hole Economic Symposium will be held from Thursday to Saturday, and will help investors gauge the Fed's stance on interest rates and the broader economic outlook.

Investors are also keenly eyeing political developments in the US ahead of the presidential election due early November. The Fed is unlikely to cut interest rates ahead of the elections, Vikas Inder Jain, head of research at Reliance Securities, said. An interest rate cut could lead to a fall in other rates such as for mortgages, which would boost consumer confidence and potentially encourage voters to reward the incumbent party.

Besides debates about the possibility of rate cuts by the Fed, investors are keeping an eye out for stock valuations amid concerns about expensive valuations in some segments of the market. There are pockets of reasonable valuation, which means one has to navigate carefully, Misra of Mirae Asset Global Investments said. Expensive valuations, along with a rise in global market risks, are likely to keep flows from foreign portfolio investors volatile in the short term, ICICI Securities said in a report Friday.

The price–earnings ratio for Nifty 50 has moderated to near long-term-average levels after the recent correction, but pockets of overvaluation persist further down the market cap curve, Emkay Global Financial Services said in a report Saturday. "Near-term cues are now mixed: weak commodities, a possible US rate cut in September, and a mass consumption recovery are significant tailwinds, but slowing consumption at the premium-end remains a worry," the brokerage said. "We think the market is fairly valued and a near-term upside would come only if the earnings revision momentum returns."

Valuations are mixed right now, with those of banking stocks below their 10-year averages, while those of sectors such as defence are above their 10-year averages, Jain of Reliance Securities said. The head of research at another domestic brokerage agreed that some segments of the market are at high valuations. Defence, railways, new-age information technology, electric vehicles, and some metal stocks are overvalued, the head of research said.

The recently concluded June quarter earnings season is also likely to negatively affect investor sentiment as several companies reported muted earnings growth. The BSE500 companies posted negative bottom-line growth, while top-line momentum remained muted across sectors, with energy companies dragging overall margins, Emkay Global said in its report. One worry is that the ratio of negative surprises rose sharply in the quarter, the brokerage said.

Coming to specific sectors, analysts expect banking stocks to gain in the upcoming sessions. Banking stocks are expected to lead the upward move, especially private banks, Jain of Reliance Securities said. While there are worries over deposit growth at private banks, the valuations of these stocks are at comfortable levels in comparison to their peers, which makes them appealing to investors. Meanwhile, public-sector banks are expected to gain more in the upcoming session, as these stocks have been underperforming for a while.

Today, the Nifty 50 closed 0.1% higher at 24572.65 points while the Sensex closed marginally lower at 80424.68 points. The Nifty 50 moved in a range of around 115 points today. The benchmark is expected to find support at 24400 points and resistance at 24700 points.  End

Edited by Rajeev Pai

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