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Informist, Saturday, Oct. 5, 2024

 

By Anjana Therese Antony

 

MUMBAI – Indian equities could remain under pressure this month as investors across the globe are turning risk-averse due to escalating geopolitical tensions in West Asia, rising crude oil prices, and slowdown in the world economy, experts said. The month will be an eventful one with corporate earnings taking centre stage, while the Reserve Bank of India's monetary policy review, due next week, will add to the uncertainty. 

 

For the benchmark Nifty 50 index, the support is seen at 24650 points, as per the median of inputs from 10 broking firms. This is nearly 365 points or 1.5% lower than the index's Friday closing level of 25014.60 points. This is also around 6% lower than the record high of 26277.35 points it hit on Sept. 27. 

 

However, the sell-off in Indian shares may be bought into by long-term investors, including domestic institutions as well as retail, believe market experts. The resilience of the domestic economy, the government's thrust on infrastructure and benign inflation, along with prospects of a pick-up in private capital expenditure make Indian equities an attractive bet, they said. 

 

The resistance for the Nifty 50 is seen at 25900 points, according to the median of estimates. This is over 885 points, or 3.5%, higher than Friday's closing level and 1.4% lower than the all-time high level. 

 

GLOBAL WOES

The rising geopolitical tension between Iran and Israel pushed many global markets, including India, into sharp losses last week. Tensions in West Asia escalated after an Israeli strike on central Beirut's Bachoura early Thursday left two killed and 11 wounded. 

 

On Tuesday, Iran fired more than 180 ballistic missiles at Israel, escalating hostilities. "Israel's threat of retaliation, particularly if it targets Iran's oil infrastructure, could further support rising (crude) prices," Rahul Kalantri, vice president – commodities at Mehta Equities, said in a note Thursday. The Brent Crude December futures contract traded on the Intercontinental Exchange closed 0.7% higher at $78.14 per barrel Friday.

 

"Whenever global events similar to the current geopolitical tension in the Middle East happens, market undergo correction due to higher uncertainty geopolitically," Dhananjay Sinha, co-head of equities at Systematix Group, said. The sentiment could be impacted in the near term, he said. The Nifty 50 and Sensex lost 4.5?ch last week, compared with a 0.8% rise in the MSCI Asia Pacific ex-Japan index. 

 

Foreign portfolio investors were responsible for a bulk of this rout in the indices. On Thursday, they sold shares worth INR 152.43 billion, followed by net selling of INR 98.97 billion Friday. 

 

Another factor that may have exacerbated the sell-off in Indian shares by foreign fund managers is the recent announcement of a stimulus in China, which has improved the return potential of the underperforming region, analysts said. "The quantum of stimulus which they (China) have announced this time is much higher than what they have done in the recent past," George Thomas, fund manager – equity at Quantum Asset Management Co, said. If China's growth picks up, there is a possibility for foreign investments getting diverted from India, given the valuations are way cheaper in China, Thomas added. 

 

Foreign investors sold equities worth INR 152.43 billion in the first three trading sessions in October, almost two times the INR 97.92 billion sold in the full month of September. On the other hand, domestic institutional investors continued to support the market, purchasing shares aggregating to INR 129.14 billion till Thursday in October, much higher than the INR 66.46 billion bought in September.

 

Last week, the People's Bank of China asked commercial banks to lower mortgage rates for existing home loans before Oct. 31. This came after the apex bank announced several other stimulus measures, including cutting its seven-day reverse repurchase rate and lowering the reserve requirement ratio for banks. The government of China had lowered the minimum down payment ratio on second home purchases to 15% from 25?rlier.

 

EARNINGS

A worsening global backdrop will mean that equity investors will have their eyes hooked onto the September quarter earnings of companies, especially for the commentary by managements to assess the impact of developments such as rising crude oil prices. Corporate India's performance for Jul-Sept is seen as lacklustre, according to experts. 

 

"The earnings season does not look very robust. The demand has been somewhat on the weaker side," Sinha of Systematix Group said. Companies are trying to increase prices to compensate for rising costs, but they are not able to do so, which indicates the growth in profit and volume will be complicated, Sinha added. 

 

Market experts also echoed the probability of further earnings estimate downgrades, compared to upgrades in the last couple of years. 

 

In the second half of the financial year 2023-24, a series of earnings downgrades happened across sectors. However, the downgrade rate of 5.3% was below the 10-year average, suggesting that the overall credit quality of Indian corporates remains stable, while some sectors are facing challenges, CRISIL Ratings said in its report Thursday. 

 

For information technology companies, no major improvement in the demand environment is expected to have happened in the September quarter, though some green shoots of recovery with stable deal wins and a likely recovery in clients' discretionary spending may be seen. The Indian IT giant Tata Consultancy Services will kick-start the earnings season on Thursday.

 

When it comes to consumer goods companies, analysts said the overall volume growth is softer than initial expectations, possibly due to heavy rain or higher competition. The overall outlook remains positive and rural demand continues to report a gradual recovery, Nuvama Institutional Equities said in its earnings preview report. 

 

The upcoming festival season increased automobile sales in September, especially for two-wheelers, while commercial vehicles saw weakness due to slowdown in execution of infrastructure projects and a heavy monsoon, analysts tracking the sector said. With rural demand expected to improve, earnings of automobile companies are expected to pick up pace, they said. 

 

For banks, shortages in deposits and tightened liquidity are likely to continue to weigh on their performance, analysts said. When it comes to oil companies, there could be a marginal decrease in net crude realisations for upstream players due to windfall taxes and a fall in crude prices during the September quarter, YES Securities said in its earnings preview report. The broking firm also expects Indian steel producers to experience margin contraction in Jul-Sept, as falling realisation prices clash with a mostly flat cost structure compared to the previous quarter.

 

F&O VOLUME 

Another factor that might add some volatility to the equity market is the recent set of restrictions imposed by the Securities and Exchange Board of India in the futures and options segment. These tighter rules are making investors cut their long positions, and analysts expect the trading volume to fall significantly. 

 

"The current weakness has more to do with FIIs (foreign institutional investors) cutting down their long positions in the F&O market," Pankaj Pandey, head of research at ICICI Securities, said. While the bulk of pain is behind us, it is still early to rule out that the weakness would not happen because of further potential cuts in their positions, Pandey said. The current weakness is not due to any bearish stance of foreign investors, he added.

 

The trading volume in the derivatives market is expected to fall significantly. "The impact will be more in options than futures," Vipin Kumar, senior technical and derivatives analyst at Globe Capital Market, said. "On every expiry, volumes in expiry contracts are much higher than non-expiry contracts. One expiry in a week means one high-volume day every week," Kumar added. 

 

The market regulator Tuesday said there will be weekly expiry in only one benchmark index per exchange. The number of indices on which weekly options contracts are available will shrink to two from the current six. Currently, the National Stock Exchange of India Ltd. offers weekly expiry in options contracts of Nifty 50, Nifty Bank, Nifty Financial Services, and Nifty Midcap Select indices, while BSE offers the same in the Sensex and the Bankex indices. 

 

MPC MEETING

Market participants said they do not expect the Reserve Bank of India's policy outcome on Oct. 9 to have any major impact on the domestic equity market, similar to how it was in the last few months. There are divided views about the RBI's decision, with some market participants expecting no change in stance or repo rate due to the rising tension in West Asia. Another section of experts believes the apex bank may reduce repo rates by 25 basis points and change the stance to 'neutral' on expectations of a benign inflation and robust economic growth.  

 

"With the Fed (US Federal Reserve) cutting rates by 50 bps, the bets are growing that the RBI would also follow suit with a 25-bps rate cut in its October meet to avoid the risk of monetary divergence," IDBI Capital Markets and Securities said in its monthly overview report. The 50-bps rate cut has brought down bond yields across the board, raising the equity valuations, especially in emerging markets like India, the broking firm said.

 

This will be the first policy committee meeting of the RBI with new external members on board, and the first after the US Fed cut interest rates. On Tuesday, the government named Ram Singh, economist Saugata Bhattacharya, and Nagesh Kumar as new external members of the RBI's Monetary Policy Committee for four years. Singh is the director of Delhi School of Economics and Kumar is the director and chief executive of Institute for Studies in Industrial Development. The three new members succeed Shashanka Bhide, Ashima Goyal, and Jayanth Varma who were appointed in 2020. 

 

Following are the support and resistance levels for the Nifty 50 index for October, based on inputs from 10 brokerage houses:

Broking Firm	Support 1	Support 2	Resistance 1	Resistance 2
Axis Securities	25100	24650	25660	26950
BP Wealth	24784	24397	25617	26046
Choice Equity Broking	24750	24500	25300	25800
Globe Capital Market	24500	24080	26300	--
ICICI Securities	24800	--	26000	26200
IDBI Capital Markets & Securities	24800	--	26500	--
Sharekhan	24500	23600	26500	27000
StoxBox	25030	24600	25395	25810
Way2Wealth Brokers	24650	23890	25800	26000
Indiacharts	24500	23400	25740	26277

 

End

With inputs from Team Informist

US$1 = INR 83.97

 

Edited by Manisha Baxla

 

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