Await Results To Enter Fundamentally Strong Stocks
Lately, the Indian stock markets breached their crucial levels, but could not sustain and were dragged down by sectoral or stock-specific triggers. Metals, which hold nearly 4% weightage in the benchmark indices, were one of the major contributors to the market volatility. Initially, the rise in global commodity prices had pulled the metal stocks up, after the sharp fall in the month of March. Metal stocks retreated yet again with the rise in aluminium prices. Further, the IT sector which holds 12.7% weightage in the indices, witnessed profit-booking after hitting all-time high levels on the back of better-than-expected results from the pivotals.
However, the market fall was limited as the banks and NBFCs, which form more than 35% of the major indices, maintained optimism and acted as counterweight. On the stock-specific front, some of the worse-than-expected results triggered a downfall in the index stocks, which dragged down the markets. Otherwise, the results have been in line with the expectations, but the stocks witnessed profit-booking as the results were already factored in. All-in-all, on the domestic front, despite recovery in few major sectors, the negative bias gave rise to a pull-back in the stock markets.
On the global front, the world indices remained cautious ahead of the Federal Reserve meet. But, as expected, despite strong economic growth and robust labour market, the Fed kept the interest rates unchanged in the May meeting. Though the Fed is in favour of 2-3 rate hikes each year, it is keen on maintaining the rates below the historically lower levels. The next hike might be seen in the June meeting. The markets would closely monitor the actual and forecasted inflation rate, which now stands close to 2%. Further, wariness on US-China trade talks impacted the global markets. Meanwhile, investors got some relief with fall in the crude oil prices amid rise in the US inventories when production reached its highest in 2018.
As for the Indian equity markets, the rising bond yield more than the earnings yield is expected to decrease the risk premium for the domestic investors. Further, the economic boom in the US and the rising 10-year US bond yield may attract foreign investors to the US. A rate hike by the Fed, rising oil import bill and burgeoning fiscal deficit would further ruin the earnings yield. What can save the domestic markets is the corporate earnings, followed by favourable monsoon, which could bring the domestic macros on track. The broader market companies are already trading at higher PE multiples, which would refrain very strong upside.
For now, investors should await the release of the earnings reports and hold the ones with positive earnings and monsoon-related stocks. We also suggest investors to exit the stocks with negative Q4 and FY18 performances as the stock prices have become vulnerable to the result announcements. One can re-enter the fundamentally strong stocks at lower levels. For fresh buying, investors can wait for the short-term volatility post announcement of results to pass over before entering in the fundamentally strong stocks.
