Domestic stocks have been witnessing choppiness over the past week after a strong rally since mid-February. Yet, market-wide rollover of derivative contracts to May series suggests traders are paying little heed to the weakening macro-economic indicators and are gung ho on market prospects, as they price in a favourable election outcome.
Yet, macros are increasingly turning unfavourable. Brent crude rules near $75 and is poised for more gains when the US tightens its sanctions on Iran early May.
The rupee has been witnessing a lot of pressure; it slumped 39 paise to close at a six-week low of 70.25 against the US dollar on Thursday. And some key indicators of the economy like auto sales numbers are showing signs of an imminent slowdown.
That does not look like a strong foundation for a market rally to build on. Analysts say 3Es – election, economy and earnings – will decide market direction from here on, and only one of them is looking somewhat comfortable at this stage.
Equity benchmarks Sensex and Nifty scaled all-time high levels earlier this month, rallying some 10 per cent since their February 2019 lows amid unabated inflows from foreign institutional investors and hopes of Prime Minister Narendra Modi returning to power.
On an average, overseas investors have poured more than Rs 1,300 crore a day into Indian equities since February 1, which was deployed largely in largecap stocks and front-running names from across sectors. Even beaten-down midcaps and smallcaps have gained momentum in the past two months.
Analysts say this is a pre-election rally, driven entirely by increased liquidity. It has nothing to do with select sectors at this point. An adverse verdict in the elections can bring about major changes in the market.
“Investors should remain cautious. They should pick stocks wisely. There is no exceptional theme to play at this point of time. Most sectors are up and one must wait till the election results are out to put their money in quality names,” said Shyam Sekhar, co-founder, iThought.
Siddharth Sedani, Vice President for Equity & Portfolio Advisory, Anand Rathi Financial Services, said the market would be a little volatile and nervous till elections and earnings season get over.
“However, stock-specific momentum will continue and we can see strong performance in midcaps where the business momentum is intact,” he said.
After falling up to 40 per cent between January 1, 2018 and February 19, 2019, all the sectoral indices on BSE have moved northward. Realty, Consumer Durables, Power, Metal, Capital Goods and Oil indices and Bankex have climbed over 10 per cent since February 19. Others like Healthcare, Auto, IT, FMCG, Teck and telecom indices gained between 3 per cent and 9 per cent during this period.
“After about eight disappointing quarters, we could see about 13 per cent to 15 per cent PAT growth in Q4 earnings, largely boosted by private financial and metal firms. OMCs are not expected to do well because of cyclical oil price movement,” he said.
Mehta advised investors to bet on select capital goods, private financials and banking names. He said HDFC BankNSE 0.77 % can do well in the short run. Other retail banks such as RBL BankNSE 0.59 %, ICICI BankNSE 2.98 % and Axis BankNSE 2.56 % too can do well.
Among defensive bets, consumer stocks like Britannia IndustriesNSE -0.05 % and HUL look good as does capital goods major L&T, he said.
Smallcap and midcap players like Tara Jewels, Kwality, KSK Energy Ventures, Jyoti Structures, Rolta India, ABG Shipyard, which have lost over 90 per cent of their value since January 2018, have risen up to 275 per cent from their February lows.
Others like BIL Energy System, Jai Balaji Industries, PC Jewellers, Suzlon Energy, E-Land Apparel, Nu Teck India and MPS Infotechnics have rallied between 100 per cent and 330 per cent during the same period.
RBI recently lowered the GDP growth forecast for this financial year to 7.2 per cent from an earlier estimate of 7.4 per cent amid the probability of El Nino affecting monsoon rains and uncertain global economic outlook.
In its February monetary policy statement, RBI projected the GDP growth for 2019-20 at 7.4 per cent, with growth for the first half (April-September) estimated at 7.2-7.4 per cent.
“Our growth trajectory is very high. Post elections, we will have a better picture of the economy. This will decide the fate of the market,” said Mehta.