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Informist, Thursday, Dec. 5, 2024

By Anjana Therese Antony

MUMBAI – The worries that were bothering equity investors a month ago are now "long gone", with the fog around foreign investor outflows and government spending expected to clear up and pave the way for the market to start rising again, at least a bit, in December. Though the recent correction has made room for some fresh buying, experts believe the quantum of foreign inflows may not be significant and returns from the market would be far less than what they were a couple of years ago. Expensive valuations and an increasing interest in the US market on hope of gains from Donald Trump's new regime are the reasons the domestic market may not rise much, analysts and traders said. 

"From a fundamental perspective, things are not as bad as the market perceives. But valuation is still a challenge and it has not come down in most parts of the market, barring select pockets of private sector banks and a few names in insurance," George Thomas, fund manager – equity at Quantum Asset Management Co., said. From a broader level, things have not come to a fairly attractive level for the market to decisively rally from here or to see very high buying interest, Thomas said. 

The Indian equity market has seen a bear run for two months now starting October, due to sharp foreign outflows, mainly to the US and China, a slowdown in domestic earnings growth, downgrades in earnings estimates for 2024-25 (Apr-Mar) and FY26, expensive valuations, and depreciation of the rupee, among others. The benchmark Nifty 50 index fell over 11% from its record high hit on Sept. 27, and while it has recovered a bit, it is still down 6% from that peak.

The index is not expected to scale back to that level in December; indeed, the downside expected in December is higher than the upside. The resistance for the 50-stock index is seen at 25200 points, according to the median of estimates from 10 broking firms. This is nearly 2% higher from the close Thursday. The last time the index closed above the 25000 level was on Oct. 15.

On the other hand, the Nifty 50's support is seen at 23817.50 points. This is 3.6% down from the current level and over 9% down from its record high. The index had closed below this support level five days in November. 

Experts sounded optimistic and said the second half of FY25 would be better than the first half, supported by a pickup in the government's capital expenditure, a likely cut in interest rates by central banks including the Reserve Bank of India, and better earnings growth in India. "The intensity of FII selling has come down and from that perspective, we would want to believe that the worst is behind," Pankaj Pandey, head of research at ICICI Securities, said. Though sharp foreign inflows are not expected, largely due to the anticipated corporate tax cuts in the US, domestic flows are sufficient to keep the market stable, Pandey added. 

In November, foreign investors net sold equities worth $2.16 billion, which was a relief after the near $11-billion worth of shares they sold in October, the highest monthly outflow the country has seen. So far in December, they have net purchased shares aggregating $1.88 billion. 

Experts believe returns from the stock market for at least a year would be far lower than in the recent past. "Returns would be stock specific and won't be a broad-based rally," Vinit Bolinjkar, head of research at Ventura Securities, said. Large-caps are undergoing a new churn, but returns would be muted, he added. Valuations of large-cap peers have moderated on account of falling yields and market corrections, but now is not the right time to enter the market as stocks are still expensive, analysts said. Barring certain pockets of private sector banks and a few insurance stocks, most others are considered expensive, analysts said. 

The frothy valuations in the mid-cap and small-cap space remain a worry. Many, including the market regulator, have warned investors about the "bubbles" in the broader market and the risks in the derivatives segment where retail investors have burnt their fingers. "There are clearer warning signs in the small- and mid-cap sections of the market, and these could weaken further," research firm Capital Economics said in its report last week. Analysts said the fundamentals are not clearly strong in these spaces and that there are chances of more corrections in the medium term. 

On outflows to the US and China, experts said the worst is behind us, though foreign institutional investors would look for valuations to improve to enter the Indian market. The market has factored in all speculations related to US president-elect Donald Trump's policies once he takes over the White House, analysts said. "If we are to go with how things transpired in the previous Trump regime, generally things don't materialise to the extent in which the rhetoric is there, and the worst should be over now," Thomas of Quantum AMC said. Trump will officially take charge as the 47th president of the US in January.

India is expected to benefit from Trump's likely trade restrictions on China, but only gradually over the next few years, analysts said. It will not be easy for India to reap the fruit of such a diversion as China has built massive infrastructure over the years, they said. Some fund managers opined that it might take some time for the impact of the stimulus announced in China to kick in and that it would be difficult for the country to structurally revive its economic growth trajectory in the near term. 

An aggravation in the geopolitical tension between Ukraine and Russia or Israel and Iran could pull the market lower, analysts said. Traders and analysts are watching these situations closely, given their potential to disrupt crude oil supplies. Russia is the second-largest crude oil exporter in the world and is the largest oil supplier to India. Iran is the fourth-largest crude oil producer in the Organization of the Petroleum Exporting Countries. Any disruption in these two countries could lead to volatility in crude oil prices. 

RBI, US FED

All eyes are on the Reserve Bank of India's monetary policy decision due on Friday. While many market participants expect the apex bank to hold the repo rate at 6.50% for the 11th consecutive time and retain its 'neutral' stance, a section of analysts expects a 25-basis-point cut. Investors also hope for some measures that could boost the liquidity in the banking system, such as a 50-bps reduction in cash reserve ratio, the mandated minimum percentage of total deposits that commercial banks must maintain as reserves with the central bank, from the current 4.5%. "This time RBI may not take a dovish stance as food inflation is still high, but they can reduce the CRR," Bolinjkar of Ventura Securities said. 

The September quarter GDP data showing slower-than-expected economic growth in India sparked worry, but the equity market shrugged it off on expectation of a better macroeconomic environment in the coming months. The GDP growth in Jul-Sept was 5.4%, sharply lower than the 6.5% anticipated by economists and the slowest in seven quarters. A sequential rise in food prices had pushed India's inflation to the highest level in 14 months at 6.2% in October, which extinguished hopes of a rate cut in December. "This (inflation of 6.2%) was a one off largely due to key agri commodities like tomato, potato, etc. contributing the biggest to inflation. If we strip these out, inflation is around 4%, so from that point, it is not a worry," Pandey of ICICI Securities said. 

The RBI governor, on multiple occasions, has said the central bank will not look at the interest rate decisions in the US to make decisions on domestic monetary policy, but will only look at domestic inflation and economic growth. He also said inflation should come to its target and sustain there before the RBI can consider rate cuts.

The US Federal Open Market Committee is scheduled to meet from Dec 17-18 to announce its monetary policy decision. The FOMC had reduced the federal fund rates by 25 bps in November to 4.50-4.75% after surprising global investors with a 50-bps cut in September. However, Fed chair Jerome Powell this week said the Fed can afford to be a little more cautious about rate cuts as the US economy continues to grow strongly.

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

End

US$1 = INR 84.73

With inputs from Team Informist

Edited by Deepshikha Bhardwaj

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