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Nachiket Kelkar
Nachiket Kelkar

MARKETS

Markets may trade range-bound near-term, but analysts still bullish

INDIA-ECONOMY-STOCKS Rising political tensions between North Korea and the US became an excuse for market to take a breather as it was almost moving one way up and had reached fresh life highs | File

Fed's signals and current geopolitical conditions coupled with strained fiscal deficit to impact markets

The US Federal Reserve has signalled an end to quantitative easing, the rupee is depreciating, there are pressures on India's fiscal and current account deficit (CAD) and foreign institutional investors are pulling out—all conditions suggesting we could be heading into a perfect storm, according to a few analysts. To add to it, a broader earnings recovery still looks somewhat distant and private sector spending is yet to pick up meaningfully. Not surprisingly, the benchmark NSE Nifty 50 has shaved off 2.8 per cent over the last five trading sessions. The BSE Sensex, too, has tumbled 2.5 per cent during the same period.

Both the indices were further trading marginally in the red on Tuesday morning.

“US Federal Reserve’s hawkish monetary policy stance and decision to begin its balance sheet reduction program in October 2017, along with rising geopolitical risks, coincided with other domestic challenges for Indian equities, which include fears of combined fiscal slippage due to the state farm loan waivers, uncertainty in achieving budget revenue targets, and proposed fiscal stimulus by the central government," said Vinod Karki, vice president at ICICI Securities.

There are several worrying factors making investors nervous. The CAD rose to 2.4 per cent of the GDP in the quarter ended June 30, versus 0.1 per cent a year ago; the rupee is trading closer to its six-month low and the GDP growth came off sharply last quarter to 5.7 per cent, due to the tapering effects of demonetisation and roll out of the Goods and Services Tax.

Meanwile, rising geopolitical tensions and the escalating war of words between North Korea and the US has also kept investors on the edge.

Earlier this week, US President Donald Trump widened sanctions against North Korea, while the latter accused Trump of declaring war and warned it had the right to shoot down US war planes flying in the Korean peninsula.

"The markets have shown some volatility in last few days led by geopolitical developments over North Korean actions. This development became an excuse for market to take a breather as it was almost moving one way up and had reached fresh life highs," said Kunj Bansal, executive director at Centrum Wealth Management.

Over August and September, FIIs have pulled out close to Rs 17,500 crore from India's equity markets. Mutual funds, meanwhile, have seen record investments. Inflows in August topped a record Rs 20,000 crore as domestic interest rates have fallen, making bank deposits unattractive.

Is the bear grip tightening or is this only a much-needed correction in the bull market?

"Market performance in the last six months was not driven by any fundamental factors, earnings estimates were only cut... Clearly for this year, there is a reasonable downside for consensus earnings estimates. Inflation could rise and the rupee may also fall further. So near-term, the outlook does look hazy. Had the huge domestic investment flows not been there, we might have seen a sharper decline. These flows can protect the downside, but, for the next couple of quarters, I would expect the markets to be range-bound," said V. Srivatsa, executive vice president and fund manager at UTI Mutual Fund.

However, he still remains optimistic on the longer term and doesn't feel this is a start of a long, bearish phase. Srivatsa draws attention to the performance since the Narendra Modi-government came to power; there were phases where market ran up sharply, but there was also a phase of prolonged correction, still the markets went on to their record earlier this year. So, this correction could also be seen in that perspective and markets may bounce back over time once the growth drivers pickup.

Many other analysts agree.

"The equity bull market is intact and Indian equities are currently in a consolidation/bull-market correction phase," said ICICI Securities' Karki. He added the government’s proposed fiscal stimulus around the festive season will have a positive effect on aggregate demand and stocks in the short-term.

Looking ahead, investors will looking for any signs of pick-up as companies announce their earnings for the July-September quarter from next month, even as they will also be closely watching global geopolitical developments.

The US Fed has said that it will start trimming its balance sheet from October, which will limit global liquidity. However, if domestic investors continue to pump in money in equities, one need not worry much, say analysts. "Given the liquidity on the sidelines from domestic institutions and better hopefully 'non-disrupted' festive quarters ahead, the outlook is more constructive than it has been since late last year and would be one where one 'buys on dips' rather than sell into them," said Bansal of Centrum Wealth Management.  

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