Even as the stock market rebounded on Tuesday after a nine-day selloff, sentiment remains fragile amid escalating US-China trade woes, looming uncertainty over general election outcome and a slew of disappointing quarterly earnings. Given signs of a slowdown in the domestic economy, analysts said, the prevailing volatility is unlikely to go away any time soon.
Based on data, the 30-share Sensex is down 5.5 per cent from its all-time high of 39,487 on April 18. FPI flows, which had been pretty strong in the past two months, have turned negative (Rs 3,000 crore outflows so far this month). The rupee is also ruling at a two-month low. It settled at 70.44 against the dollar on Tuesday.
"The slowdown in the economy is for real. How the new government handles the situation will be the key monitorable, going forward," said AK Prabhakar, the head of research at IDBI Capital. "Sign of economic slowdown is a major worry for the stock market that will aggravate if a coalition government takes over the reins. We need a strong government to tackle the slowdown. Pre-poll alliance forming the government will still be fine but too many parties giving support to one party will be difficult to manage."
According to data, IIP contracted by 0.1 per cent year-on-year in March 2019 due to weak demand scenario. "India has faced an unexpected slowdown in consumer demand leading to an inventory build-up. An inventory correction, which we believe is under progress, can exaggerate the extent of the slowdown in final demand," points out brokerage JM Financial in a research report.
Deepak Jasani, Head of retail research, HDFC securities believes the market could see some small upside volatility in case the outcome of elections is favourable, else it could keep underperforming, especially the broader market.
"Markets will take in stride any majority party forming the government, but a coalition government headed by a non-Congress and a non-BJP party is something the domestic and global investors could be wary of," he says.
Trade war jitters
The ongoing trade war between the US and China had triggered the recent correction in the market. However, Arun Kumar, market strategist, Reliance Securities believes it will only have a sentimental impact on the market. "There could be a panic reaction if the deal falls through but that could be a good opportunity for investors to buy quality stocks at attractive valuations with healthy margins of safety," he notes.
Earlier this week, US President Donald Trump had increased tariffs on $250 billion of Chinese goods from 10 per cent to 25 per cent. He also threatened to impose tariffs on remaining $325 billion Chinese imports in the coming month if China does not strike a deal with the US in this period. On Monday, China retaliated by increasing tariffs from 5 per cent to a range of 5-25 per cent on $60 billion of US imports.
Kumar of Reliance Securities advises investors to stay away from the market for time-being as it is a traders' market. He sees Nifty to find support in the range of 10,700-10,900 in the short-term.
While Street remains watchful on corporate earnings, Gautam Chhaochharia, Analyst, UBS Securities India, sees earnings cuts going forward. "As the Nifty is trading at 20 times 12-month forward PE (on our top-down earnings forecast), we think risk-reward appears unfavourable," he says.
JM Financial recommends a bottom-up approach in the market with a mix of stocks with either positive earnings revisions or where valuations are at a discount to its historical averages.
"Amongst large-cap sectors, we recommend overweight on private financials, industrials and a few select non-financials PSUs. Amongst midcap sectors, we like the real estate and chemicals sectors," it says.
Prabhakar of IDBI Capital sees value in growth stocks. Private banks and hotels look good to me, he says.
Markets on Tuesday
The Nifty settled at 11,222.05, up 0.6 per cent from its previous close. Nifty PSU Bank (up 2.85 per cent) was the top sectoral gainer, followed by Nifty Pharma (up 1.5 per cent).
On Monday, the pharma index closed 4.37 per cent lower, with Sun Pharma logging its worst session in nearly two years after many pharma companies were named in an anti-trust lawsuit filed by 44 US states accusing them of price manipulation. Glenmark, Lupin, Zydus, Cadila, Taro (Sun Pharma's subsidiary), Aurobindo, Wockhardt and Dr Reddy's have been mentioned in the case.
"While anti-trust investigations can go on for several years until liability is established, conclusive early findings can result in huge downsides for the firms involved. We expect Aurobindo to be the least impacted by the lawsuit while Glenmark could face the maximum liability," says JM Financial in a report.