After The Mayhem, Revival In Corporate Earnings Expected To Lend Support

We had talked of some correction that was essential for the Indian stock markets for a better move on the upside. Indian benchmark indices nosedived immediately after the announcement of the Union budget, which had left the investors disappointed. Markets retreated sharply on introduction of LTCG tax at 10% on gains of more that Rs 1 lakh and dividend distribution tax at 10% on equity holdings after March 31, 2018. This led to a tremendous sell-off, probably more so by the HNIs.

Further, the weak global cues, majorly from the US, took the global indices off their record highs. The Dow Jones posted its biggest ever intra-day fall since August 2011, after S&P downgraded the credit rating of the US. The sudden spike in the 10-year treasury yield ahead of the budget deal to increase country's fiscal expenditure dragged the equities southwards. Further, the expected rise in inflation amid robust economic growth too spread pessimism, ahead of the rate hike by the US Fed and the frequent hikes expected hereafter.

Coming back to the domestic markets, the macroeconomic numbers reported in the first week of February were duly ignored by market participants on account of the disappointing budget announcements. The auto sales data remained buoyant as compared to the corresponding month of the last year. However, the transition to price hikes from the days of discounts after demonetisation and the GST roll-out resulted in softer sales in the month of January. However, the government pouring funds into agriculture and infrastructure development bodes well for the auto industry going forward.

India's manufacturing PMI however eased to 52.4 in January from a 5-year high of 54.7 in the previous month, amid lower output, new orders and relatively lower employment data. Yet, PMI of 52.4 looks convincing for continuation of expansion in the economy. The service PMI on the contrary rose to 51.7 as against 50.9 in December on the back of revival in IT and telecom sectors.

Macro numbers were followed by the RBI policy review, wherein the central bank kept the interest rates unchanged yet again and also indicated that no immediate cut was on the cards in the next few reviews. The continuing spike in inflation rate ahead of the government spending and broadening of fiscaldeficit does not allow for any rate cut. Rather, the RBI might apply a lending rate hike, which would result in higher cost of debt servicing, may be 3% of the consolidated debt from top borrowers.

Nevertheless, the correction in the market can be considered healthy for the new entrants to get in at a discount, while those who are already invested can take the opportunity to average out the cost at lower levels. The corporate earnings reports continue to pour in and the expected revival in Q3 numbers may help the markets to bounce back. The broader markets comprising the mid-caps and small-caps have initiated the reversal. A quick pick-up in the benchmark indices is not visible at the moment as there is no immediate trigger, but further sharp correction too may not occur. Keep calm and stay stock/sector-specific is what we would suggest at the moment. The trend of the Indian markets still remains positive as the DIIs have started pouring money yet again.