Markets to shift focus on fundamentals

Indian equity markets posted strong rally during the week erasing the post-budget losses on account of positive global and domestic cues. Globally, strong US economic data and cut in tariffs by China on some of the US imported goods cheered the markets. While there is fear globally with regards to coronavirus, the market is also hopeful that the coronavirus related damage might be controlled. On the domestic front, sentiments got lifted due to strong manufacturing and service PMI data and a slew of measures announced by RBI in its Monetary Policy despite keeping the rates unchanged. Further, the decline in oil prices and rupee appreciation is highly positive for India given its tight fiscal situation, which market is cheering.

Both Nifty 50 and Sensex were up 1%/1.1% to close at 12,098/41,142 for the week. Broader markets also participated in the rally with both Nifty Midcap100 and Nifty Smallcap100 being up 2% and 0.3% respectively. The majority of the sectors ended in green except Auto, Media, and Realty. Metals were the biggest gainer, followed by Pharma, Energy and IT.

Foreign institutional investors (FIIs) were net sellers, selling equities worth more than Rs 1,140 crore till Thursday while domestic institutional investors (DIIs) were net buyers to the tune of Rs 2,450 crore.

The RBI MPC kept the repo rate unchanged at 5.15%, while maintaining its accommodative stance. However, it announced various measures for real estate, auto and MSME sectors and tweaked maintenance of CRR norms in order to improve the lending environment by easing the liquidity flow and reducing the banks’ cost of funding. However, in our view, how these measures will lead to better transmission in the real economy remains unclear. Since the banking system has been in massive surplus for the past 8 months or so, further boost to supply is unlikely to revive economic activity. With inflation expected to remain high in CY20, we do not expect any rate cuts during the next 3-4 meetings.

Post budget, the market has shifted its focus back to fundamentals and earnings. On the domestic front, some of the economic data have started showing positive trends. Both manufacturing PMI data and Services PMI accelerated to 8-year/7-year high in January, owing to surge in business orders, thus raising hopes of an economic recovery.

However, we still expect the growth recovery to be gradual. We expect the markets to stay narrow until the emergence of greater evidence of growth recovery. Further, it would continue to watch out development over coronavirus. Thus, meanwhile, select sectors with better earnings visibility will continue enjoying valuation premium over the broader markets.

Technically, Nifty formed a Bullish Candle on a weekly scale as it recovered sharply from lower levels.

At the current juncture, supports are gradually shifting higher and now till the time, it holds above 12,050 levels, we may see ongoing optimism towards 12,200-12,250 zones; while on the downside, major support is seen at 12,000 then 11,950 zones.

(The writer is the head of research at Motilal Oswal Financial Services)