Indian Markets Await Election Results while US Indices Soar
Last week unfolded with a flurry of developments that captivated market observers, ranging from the resurgence of meme stocks to the speculation surrounding potential US Federal Reserve rate cuts. Amidst this whirlwind, the domestic markets found themselves grappling with volatility and foreign portfolio investment (FPI) outflows, generating significant buzz. In this analysis, we will delve into the intricacies of these events, armed with data to illuminate the path forward for investors.
The revival of meme stocks, encompassing not only GameStop and AMC but also entities like Blackberry, Virgin Galactic and Koss, has reignited discussions on the sustainability of this rally. Comparisons to the fervour witnessed in 2021 are inevitable but must be tempered by an acknowledgment of altered circumstances. In 2021, such a surge was fuelled by a confluence of low interest rates and government stimulus, which injected liquidity into the markets. However, the landscape in 2024 presents a different picture.
With elevated interest rates and no additional stimulus measures in place, the market lacks the same reservoir of disposable income that facilitated the previous rally. Consequently, replicating the momentum of 2021 appears challenging in the absence of surplus liquidity. A pivotal question gripping investors globally pertains to the timing of potential rate cuts by the US Federal Reserve. The recent Consumer Price Index (CPI) report, breaking a streak of higher-than-expected inflation figures, assuaged concerns on Wall Street.
This development spurred a surge in buying activity, propelling the US benchmark indices to record highs. Market sentiment, as reflected in the CME FedWatch Tool, indicates an increasing likelihood of rate cuts following the Federal Open Market Committee’s September meeting, with probabilities climbing from 65 per cent to approximately 75 per cent. While the CPI report offered temporary relief, elevated inflation levels cloud the path forward, leaving the rate decision poised on uncertain ground, albeit a step in the right direction.
Closer to home, two predominant factors—volatility and FPI outflows—dominated the market discourse. Understanding these dynamics is crucial for discerning the medium to long-term trajectory of the market, where enduring wealth creation unfolds. First of all, volatility, gauged by India VIX, surged to 21.88, sparking widespread apprehension among market participants. However, historical precedents reveal a tendency for India VIX to ascend prior to general elections before subsiding post-outcome, a pattern observed in 2009 and 2014.
Anticipating a similar trend, we foresee a cooling off of India VIX around early June, aligning with the view of Union Home Minister Amit Shah. Shifting focus to FPIs’ activity, portfolio investment flows have veered into negative territory at USD 2.2 billion year-to-date for CY24. However, a nuanced analysis of sectoral flows highlights a distinct pattern diverging from conventional risk-off selling.
Notably, while financials have witnessed significant divestment exceeding USD 5 billion, particularly in select private sector banks, buying activity has been observed in PSU banks. This anomaly underscores FPI confidence in domestic cyclicals and capital-intensive stocks juxtaposed against waning enthusiasm for global IT and commodities sectors, as well as mass consumption categories. In conclusion, short-term volatility is poised to persist, potentially tapering off around the outcome of the general election. Thereafter, a clear trend would emerge, and the markets would hit a fresh all-time high.
