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Informist, Tuesday, Sep 3, 2024

 

By Anshul Choudhary

 

MUMBAI – Bulls are likely to continue to be on the rampage in the Indian stock market in September, enticed by the lure of quick gains if the US Federal Reserve cuts interest rates later this month, as widely expected. However, the long-continuing bull run has tempered expectations, except perhaps of the most optimistic, and profit-booking is now almost as widely expected as the US rate cut. A cut of 25 basis points broadly seems to be priced in already, but a bigger cut or dovish commentary from the Fed will give new impetus to the bull run, analysts said.

 

On the domestic front, the upcoming festival session and expectations of better demand in rural areas are expected to lead to higher earnings growth in the second half of this financial year. These expectations, along with hope of rate cuts, are largely the reasons for the positive sentiment among investors, who have bought equities despite muted earnings growth in the June quarter.

 

According to the median of the estimates of 16 brokerage houses, the Nifty 50 is expected to scale new highs and face resistance at 25800 points, 2.1% higher than today's close of 25279.85 points. This month, the index has already hit a fresh intraday lifetime high of 25333.65 points on Monday.

 

However, there remains a risk of investors booking profits periodically owing to rich valuations, especially of mid- and small-cap stocks. The Nifty 50 is expected to find support at 24700 points, which would mean a fall of 2.3% here on.

 

The US Federal Open Market Committee will announce its interest rate decision on Sep 18. The CME FedWatch tool shows a 63% probability of a 25-bps rate cut this month, and a 37% probability of a 50-bps rate cut. Expectations of a 50-bps rate cut started building up after weak US employment data in July led to fear of a recession in the country, which could have forced the US Fed's hand at sharper rate cuts. With the Fed meeting just around the corner, any sharp correction in markets is unlikely until the Fed announces its decision, analysts said.

 

Lower interest rates are likely to improve the overall risk appetite of foreign investors, who have been conservative in buying Indian equities. The caution stemmed from high valuations, while higher rates in the US also made investing in emerging markets such as India that less attractive. Despite these concerns, flows into India have continued at the expense of China, albeit at a slower pace.

 

The unwinding of yen carry trades has further slowed down foreign flows into India. Foreign portfolio investors net bought equities worth $1.39 bln in August, down from over $3 bln each in July and June. The unwinding of yen carry trades will continue to affect flows into India as flows from Japan are the second highest after those from the US, said Sunil Jain, who covers quantitative and alternates at Elara securities. However, he expects that this impact will be limited because with the Chinese economy struggling, investments are largely going into the US, Japan, and India.

 

Several analysts said uncertainty around the US elections and the geopolitical situation in West Asia may cap flows from foreign investors despite a US rate cut in September. However, Jain of Elara argues that historically, there is little correlation between such events and flows. Unless geopolitical concerns turn into a full-fledged war, as in the case of Ukraine-Russia two years ago, the current trend of flows is likely to continue, Jain said.

 

Apart from foreign funds, flows from domestic funds have been driving stock valuations higher. Domestic flows have been touching new records with retail investors contributing significantly through mutual funds. As of last week, domestic institutional investors bought equities worth 2.42 trln rupees this year, already crossing the full-year figure of 1.74 trln rupees of inflows in 2023. Analysts expect domestic flows to continue at the current pace as they don't see any near-term negative triggers.

 

TALE OF SECOND HALF

Corporate earnings for the June quarter did not excite analysts, but despite that, the Nifty 50 has risen over 13% so far this financial year. Motilal Oswal Financial Services said in a report that the net profit of Nifty 50 constituents rose 4% on year in the June quarter, which it said was the slowest since the June quarter of 2020.

 

The optimism among market participants stems from expectations that a large part of corporate earnings will come in the second half of this financial year. With disruptions due to the General Election in April and the monsoon season accounted for, analysts are positive that the top 50 Indian companies are on track to report 14-15% growth in net profit this financial year. The upcoming festival season and hope of better demand from rural areas are boosting sentiment around earnings growth.

 

"There is Ganesh Chaturthi in September, then all the other festivals are lined up from October...we are already seeing some green shoots in terms of rural recovery and revival in consumption demand and if that happens, I would want to believe H2 (Oct-Mar) will be better than H1 (Apr-Sep)," Pawan Parakh, fund manager at Geojit Financial, said.

 

Apart from expectations of better demand at home, analysts hope the situation will improve for information technology companies once interest rates start falling in the US from September. This is important for the Nifty 50, as IT companies account for 14% of the index – the second highest after financial services. 

 

"Recession worries in the US have come down...major point is management guidance (by IT companies) has been improving from the last two quarters," said Krishna Appala, senior research analyst at Capitalmind Research, a portfolio management services firm with over 20 bln rupees of assets under management.

 

A rate cut at this point may push US clients to begin spending on IT services, which has been on the back burner owing to high interest rates, analysts said. Brokerage Motilal Oswal spoke on similar lines in a report after the Apr-Jun earnings. "...we believe the cycle could be turning and clients are beginning to reinvest their savings from cost-reduction programmes to reduce technological debt," it said.

 

VALUATIONS

While expectations of healthy earnings growth and interest rate cuts bringing down the overall cost of borrowing are likely to keep sentiment positive, a large part of this is seen as already priced in. Benchmark indices have already witnessed a sharp run-up ahead of these events, with the Nifty 50 rising 16% so far this year. The Nifty Midcap 150 is up 28% and the Nifty Smallcap 250 has gained over 30%.

 

This rise is making analysts cautious, with some of them even advising investors to book profits, as the rise comes on top of the healthy gains seen in the previous year. In 2023, the Nifty 50, the Nifty Midcap 150, and the Nifty Smallcap 250 had gained 20%, 44%, and 48%, respectively.

 

"A Fed rate cut in September appears inevitable and the (US) bond market is now pricing in around 100 bps by December. We think the RBI (Reserve Bank of India) will follow suit, with a strong chance of front-ending in October or December," Emkay Global Financial Services said in a strategy report on Monday.

 

However, the brokerage went on to say that looking at the gains in the past several months, some of the rate easing cycle is already priced in. Analysts said that a 25-bps rate cut by the US Fed this month is priced in and cautioned that investors might book profits if the US Federal Reserve's commentary is not favourable towards more rate cuts.

 

"Several stocks are above their 10-year averages, which does not make it compelling to make investments across the board...this is largely in mid-cap and small-cap space," Pawan of Geojit Financial said.

 

Defence-related stocks and public sector undertakings were some of the sectors analysts said are extremely expensive in terms of valuations. Information technology stocks have risen in a short time, with the Nifty IT gaining over 30% in the last 90 sessions, raising concern around their valuations as well. Moreover, fast-moving consumer goods companies, which had seen dismal earnings growth in the previous financial year, saw buying in the past few months due to expectations of better rural demand, which makes it difficult for analysts to recommend these for now.

 

Having said that, analysts are largely concerned about valuations in the mid-caps and small-caps space, while they consider large-caps to be in a comparatively better position. "At the Nifty 50 level, we are still a tad below our five-year and 10-year median. So, we are not overly expensive...a 10% correction from here could provide a good entry point," Krishna Appala of Capitalmind Research, said.

 

This dilemma between large-caps and others is playing out in foreign flows as well. Jain of Elara Securities said foreign investors had turned their focus to large-caps five months ago, and this has intensified in the past two months. "Pressure has started building up on India mid-cap funds which saw eighth week of outflow totalling $270 mln. This week's redemptions stood at $60 mln," Jain said in report on Friday.

 

Following are the support and resistance levels for the Nifty 50 index for September, based on inputs from 16 brokerage houses:

 

Brokerage firm	Support 1	Support 2	Resistance 1	Resistance 2
5Paisa Capital	25000	24500	25800	-
Anand Rathi Shares and Stock Brokers	24800	-	26000	-
Axis Securities	24900	24450	25550	25900
Choice Equity Broking	25000	-	25500	-
Globe Capital Market	24450	-	25800	26000
ICICI Securities	24800	24700	25400	-
IDBI Capital Markets & Securities	24500	23800	26345	-
Lakshmishree Investment and Securities	25000	24830	25500	-
LKP Securities	24700	23500	25500	26200
Master Trust	23900	-	25800	-
Monarch Networth Capital	25000	-	25700	-
NVS Brokerage	24900	-	25700	25750
Religare Broking	24600	-	26000	-
SAMCO Securities	25000	24850	25600	-
Sharekhan	24800	24700	25800	26000
Way2Wealth Brokers	24955	24680	25400	25600

 

End

 

US$1 = 83.97 rupees

 

With inputs from Team Informist

Edited by Avishek Dutta

 

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