Informist, Thursday, Jun 6, 2024
By Anjana Therese Antony
MUMBAI - Indian equities are looking at a lacklustre month as investors are likely to remain in a wait-and-watch mode until the cloud over the economic agenda and ministry allocations under the yet-to-be-formed Narendra Modi-led government clears, market experts said. The benchmark Nifty 50 is expected to move in a narrow range in June following the perception that the risk premium associated with expensive domestic stocks has gone up after the Bharatiya Janata Party failed to secure enough seats in the Lower House of Parliament.
The 50-stock index is expected to rise gradually once some uncertainty clears, and resistance for the month is seen at 23150 points, according to the median of estimates by 13 broking firms. This level is nearly 329 points, or 1.4%, higher than the closing of 22821.40 points today. The resistance is hardly 189 points lower than the all-time high of 23338.70 points hit on Monday, after exit polls predicted that the BJP-led National Democratic Alliance would get a landslide victory, winning 360-400 seats in the 543-member house.
The market's optimism abated after the BJP managed to clinch only 240 seats, due to which headline indices recorded their sharpest intraday crash of 8% in over four years on Tuesday. While indices have recovered most of these losses, market watchers cautioned that volatility will not subside easily, as these gains have come largely due to short-covering by foreign investors in index futures. In the cash market, foreign investors have net sold 181 bln rupees worth of shares since the election outcome.
The biggest question is which portfolios will the BJP have to give its alliance partners, will it come out with populist measures at the expense of capital expenditure and whether the government will be able to implement economic reforms at a robust pace under the coalition setup, according to money managers. Reports of the BJP's alliance partners Telugu Desam Party and Janta Dal (United) asking for at least two-three portfolios and already speaking about correcting issues in policies such as Agniveer have led to concern that such challenges could keep coming up during execution of reforms, and thus cause delays, they said.
Emkay Global Financial Services turned defensive on the equity market following the election outcome. The broking firm said it anticipates near-zero returns for the market in 12 months.
The uncertainty over the pace of reforms and the government's focus is making stock valuations that had been deemed frothy in light of slowing corporate earnings growth in many pockets, look even more expensive, believe analysts. "For us, more than the election result, we are quite anchored to what the valuation matrix shows," George Thomas, fund manager - equity at Quantum Asset Management Co, said. Returns over the last three years should not be the anchor for expectations for the next two-three years and thus, investors must temper their expectations, he said.
For June, the support for the Nifty 50 is seen at 21315.20 points, according to the median of estimates. This is over 1500 points, or 6.6%, lower than today's closing level. This is also near the four-month low of 21281.45 points the index had hit on Tuesday due to the major fall.
NEW GOVERNMENT
The focus will now turn to which leaders will hold major ministries, the policies of the new government, and the full Budget in July. Views are divided on policies that the NDA could formulate along with the coalition partners. Some market participants expect the new government to adopt more populist measures to address concerns on the rural front, while others believe there may not be much deviation from the reforms the NDA had planned.
These views come after the BJP secured less-than-required seats. Had it met the benchmark, it would have enabled the party to form a government on its own, without having to rely on other parties such as the Janata Dal (United) and Naidu-led TDP.
One of the market chatter now is that the BJP will have to rely more on its alliance partners to formulate and execute
policies, which might turn the agenda primarily to measures aimed at stoking rural and mass demand. "Loss in Uttar Pradesh and Maharashtra (was) unprecedented; expect increased show of freebies and social engineering in coming elections," Prabhudas Lilladher said in its strategy report. The broking firm also said the speed of policy reforms may slow down.
This anticipation of focus on the rural front has now turned eyes to sectors dependent on rural demand, including fast-moving consumer goods and automobile. Shares related to consumption, private banks, automobiles, and healthcare may show rising traction with an expected increase in social spending and normal monsoons, Prabhudas Lilladher said. "The NDA may publish a broad policy document once the Cabinet is sworn in which would give us some perspective of the new government's policy imperatives," it said in a post-election report.
While some populist measures may be brought, a section of experts opines that the administration's infrastructure and capital expenditure-led focus, on areas such as domestic manufacturing, will sustain. "They (government) could focus a little bit more on boosting rural consumption," Thomas of Quantum Asset said. To that extent, infrastructure spending might take a hit, but a significant derailment from the current trajectory is not expected, he added.
SECTOR FOCUS
With some focus now shifting to the consumption space, analysts are turning bullish on FMCG stocks. The anticipation of populist reforms, coupled with a likely above-normal monsoon, are likely to paint a colourful picture for FMCG stocks. Most companies in the industry have borne the brunt of weak rains in the last two years, which resulted in lower sales volume and consequently, weak financials.
However, valuations aren't exactly cheap here either. Investors placing their bets in this sector took the Nifty FMCG index to its all-time high on Wednesday, with key players such as Britannia Industries, Hindustan Unilever, and Nestle India leading the gains. Though these stocks witnessed profit booking today, analysts are positive that favourable macroeconomic factors might pave the way for their growth.
Another sector that experts are bullish on is banking, especially private banks, on the back of strong earnings growth. While there were concerns about a slowdown in deposit growth and contraction in net interest margin during the March quarter, analysts said these factors will no longer be a concern, especially in the second half of the current fiscal. This is because private capital expenditure is widely anticipated to pick up during this time period and the liquidity in the system will likely improve.
When it comes to automobile stocks, there are divided views on how these companies would perform. While the rural recovery is expected to lend some foothold in the long term, some analysts said the weak outlook is likely to endure throughout this year. Most automakers posted muted sales volume growth in the month of May, as heatwave in several parts India, the General Election, and a high base in the year-ago period hit the metric. Now, the focus will be on the policies that the government will announce in the full Budget in July.
Gains in these sectors will help benchmark indices keep up their uptrend in coming weeks but on a far slower rate, said analysts. If foreign investors start buying Indian shares once the new Cabinet is announced, then the Nifty 50 could cross the 23000-mark, said traders.
MONETARY POLICY
The Monetary Policy Committee's announcement on Friday will be in the limelight, where the committee is widely expected to keep the key interest rate unchanged at 6.50% for the eighth consecutive time. The focus would be on the policy stance, which currently is 'withdrawal of accommodation' and when the apex bank will start cutting rates.
Interest rate cuts will happen when other major foreign central banks trim theirs, Vinit Bolinjkar, head of research at Ventura Securities, said. "This time their focus will be on improving the liquidity," he said. In the previous meeting in April, investors were slightly disappointed after the central bank retained its stance.
Following are the support and resistance levels for the Nifty 50 index for June, based on inputs from 13 brokerage houses:
| Broking Firm | Support 1 | Support 2 | Resistance 1 | Resistance 2 |
| Anand Rathi Shares and Stock Brokers | 21200 | -- | 23000 | -- |
| Axis Securities | 21800 | 21350 | 22700 | 23200 |
| Choice Equity | 22000 | 21500 | 23000 | -- |
| Globe Capital Market | 21200 | 21000 | 23000 | 23300 |
| Indiacharts | 21726 | 21281 | 22560 | 23338 |
| Khandwala Securities Ltd | 21280.40 | -- | 23339 | -- |
| Kotak Securities | 21800 | 21700 | 22800 | 23000 |
| Mehta Equities | 22450 | 22150 | 22700 | 23000 |
| Monarch Networth Capital | 21300 | -- | 23300 | -- |
| Religare Broking | 21200 | -- | 23000 | -- |
| Samco Securities | 21000 | -- | 23200 | -- |
| Sharekhan | 21000 | -- | 23000 | 23350 |
| Way2Wealth Brokers | 21250 | 21080 | 23200 | 23500 |
| MEDIAN | 21315.20 |
23150 |
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End
With inputs from Team Informist
Edited by vandana Hingorani
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