Weak macros dent rally in markets

Indian equity markets were lackluster and range-bound this week. Market sentiments turned somewhat negative post weak macroeconomic data releases throughout the week, Moody’s Investors Service cut in its rating outlook for India and the absence of fresh triggers in the near term. Globally confusing signals over the progress in US-China trade talks and concern about intensifying unrest in Hong Kong also dented market sentiments.

Nifty 50 closed marginally lower at 11,895 with loss of 0.1%, while Sensex closed at 40,357, with marginal gains of 0.1% for the week. On the other hand, Nifty Midcap 100 closed positively with gains of 0.5% while Nifty Smallcap 100 closed negatively with a loss of 1.2%. All the sectors closed in red except Banks (both Private and PSU) and Financial Services which gained 0.8% and 1.1% respectively. Metals were the biggest loser with a loss of 4.4% followed by FMCG (-2.1%). Media and Realty both lost ~1.5% while others lost between 0.2%-0.9%. Foreign institutional investors (FIIs) turned net sellers post consecutive buying for two weeks, selling equities worth more than Rs 320 crore. On the other hand, domestic institutional investors (DIIs) continued to be net sellers of around Rs 510 crore.

Weak macro data this week dented the market sentiments raising concerns on the growth outlook of the economy. The IIP declined 4.3% in September 2019 compared with the growth of 4.6% in the year-ago period. With such a drastic decline in IIP in September 2019, we expect real GDP growth to be closer to 4.6% in 2QFY20 (RBI’s forecast of 5.3%).

Moreover, with IIP appears poised for further weakening in 2HFY20, it raises doubts over a meaningful recovery in real GDP growth. Even CPI inflation spiked to a 16-month high of 4.6% in October on the back of costlier food items. Though retail inflation has jumped to 4.6% YoY in October 2019 from 3.3% just two months ago, we expect the RBI to place more priority on growth slowdown than higher inflation. Accordingly, we expect another rate cut in December 2019. We continue expecting headline inflation to touch 5% around December 2019-January 2020 and stay put until March 2020. Further, we expect core inflation to have bottomed out and picked up only gradually to 4% by March 2020.

Moody’s Investors Service also cut its rating outlook for the country from Stable to Negative. While the lowering of rating outlook is negative, we believe that the government has been trying to stimulate growth and hence a shift from its previous fiscal prudence. The government has taken various measures including one of the boldest reforms in the form of a corporate tax cut. RBI has also been supportive so far through its accommodative monetary policy. While these measures would take time to work on the ground, the near term concern is on the fiscal front - with lower tax incomes and higher spending - leading to a ballooning deficit. It appears that the government would be using some of the non-traditional routes including disinvestment/privatisation to fill the income gap. The long term fundamentals of the Indian economy continues to remain strong with the expected gradual recovery in growth and a domestic consumption-driven economy.

The earnings season came to an end today which witnessed weak results towards the end, thus resulting in some profit booking. Now the focus would shift back to policy initiatives/reforms that the government might take to boost the economy. Globally, investors would watch out for political situations in Hong Kong and clarity over the US-China trade deal which would drive the global markets.

Technically Nifty formed a Doji candle with long upper shadow on a daily scale which indicates an absence of follow up buying interest at higher zones. It formed the Doji candle for the second consecutive week, indicating indecisiveness among the market participants. Nifty retested the breakdown trend line on an intraday scale and corrected sharply which is restricting its upside momentum. Now it has to hold above 11850 levels to witness an up move towards 11,950 then 12,000 zones while on the downside major supports is seen at 11,780 levels.

(The author is the Head of Retail Research, MOFSL)