Stock-specific action to dominate markets this week

Equity markets did not sustain last week’s recovery and ended lower on account of US inflation soaring to above 9% and a weak start to the earnings season. Nifty/Sensex fell 171/721 points (-1.1%/-1.3%) to close at 16,049/53,761 levels.

Though the Nifty dipped below 16,000 levels during the week, it managed to close above it towards the end. The broader market, however, ended on a mixed note with Midcap 100 gaining 1.3% while Smallcap 100 ended flat.

IT fell the most losing 6% on account of weak results by IT majors. Even the banking and financial sectors lost ~1%. Rest of the sectors ended in green with pharma, auto, realty, energy and FMCG gaining 1-2%.

Global markets remained under pressure on account of worsening energy crisis and US inflation further deteriorating to 9.1% in June. Sentiments were also affected after IMF warned that it may cut its global growth forecast amid uncertain global environment. However, markets did rebound towards the end of the week as the Fed officials favoured a 75bps-rate hike as compared to a 100 bps one in the upcoming policy meeting despite record high inflation. But, recovery was limited as China’s economy contracted sharply in the second quarter, with GDP falling to 2.6% from the previous quarter. Even an uncertain political situation in Italy dented sentiments.

On the domestic front, India’s inflation cooled off a little to 7.01% and IIP grew strongly by 19.6%. Even the Wholesale Price Index (WPI) inflation declined to 15.18% in June 2022 from 15.88% in May 2022, which provided some relief to the market. However, the results season that began last week, has been weak so far with only IT companies reporting their numbers.

The rupee, too, continued to remain under pressure due to continued foreign institutional investors (FII) selling. In the meantime, many commodity prices have cooled off 30-40% in recent weeks, providing relief to the FMCG sector. Even crude prices fell to below $100/barrel which led to buying in sectors like paints, FMCG, cement, tyre, aviation etc.

Auto sector stocks have been in momentum on the back of softening input costs and an improved outlook for chip supplies. Pharma stocks are also witnessing fresh buying on account of sector rotation and attractive valuations. Thus, we are witnessing sector rotation wherein these beaten-down sectors are coming back to focus.

Though the markets bounced by ~7% from its recent low, it witnessed high volatility throughout the week. The main culprit was record high US inflation which led to fear of a more aggressive rate hike in the next Fed MPC meet and worry of a likely recession for the US economy.

On the positive side, crude prices continue to hover below $100/bbl which is rendering support to a few beaten-down sectors. Even monsoon has been progressing well with rains being 13% surplus which could provide a boost to the rural economy.

Going ahead, as the results season gains momentum more stock-specific action would be seen in the market. The health of the earnings performance would become clear as we move forward and provide some direction to the market. In the near term, the tug of war between global and domestic cues could continue to keep the market in a broad range.

(The writer is Head of Retail
Research, MOFSL)