Defensive-Sectors-May-Be-The-Best-Bets-In-This-Market
Indian stock markets retreated in the middle of a relief rally after BJP’s setback in Karnataka elections. The BJP's struggles in Gujarat followed by Karnataka depicts the party's overall weakness and vulnerability. The four years under BJP have lately been portrayed as a period of economic travails for the country in the wake of declining farm wages, higher indebtedness, decrease in industrial production and low growth in employment generation. Ultimately, BJP's Yeddyurappa had to step down as Karnataks Chief Minister and hand over the reigns to the Congress-JD(S) alliance. The formation of a non-BJP government in Karnataka has spelled difficulties for the BJP ahead of the General Elections in 2019 , The elections in Rajasthan would prove to be the final test for the BJP before the 2019 elections.
BJP’s deteriorating fortunes have been aggravated by the sharply rising crude oil prices which touched 80 dollars/barrel for the first time after 2014. This, in turn, has resulted in the rise in petrol and diesel prices, fuelling prices of commodities across the board. Rising fuel and commodity prices have resulted in dampening the operational efficiencies of most of the manufacturing industries. The corporate earnings for Q4FY18 have shown mixed results and FY19 results are expected to remain subdued. Huge NPAs, high fiscal deficit and challenging GST collections may affect government revenue collections and, in turn, force the government to cut down on expenses. With the inflating crude oil prices, the country’s inflation too is expected to stay at higher levels and may prompt the RBI to adopt a tight money policy.
Globally also, the repercussions of tightening monetary policy are seen in the emerging markets. The US would resort to interest rate hike at periodic intervals amid steady economic outlook. Lately, the dollar too is seen rising against most other currencies, with the rupee hitting 68.45/dollar for the first time after December 2016. The rupee could weaken further to 70/dollar amid concerns over current account deficit and rising crude oil prices. This would result in further sell-off by foreign investors in Indian bonds and equities. Domestic institutional investors (DIIs) are pouring money, but these DIIs seem to be more inclined towards safer havens like gold, crude and other commodities.
All-in-all, the markets are showing lower signs of immediate recovery for now, unless some major positive trigger hits the scene. The broader markets, which were the favourites before 2018, have plunged more than the benchmark indices, so much so that buying on dips has diminished portfolio returns. The mid-cap and smallcap indices are trailing at their support levels, awaiting a positive bounce. The benchmark indices have retraced more than 50% of their recent relief rally from March end to mid-May.
We are neither suggesting investors to engage in bottom-fishing in the current market as it would mean catching the proverbial falling knife, nor suggest them to stay away. This is because the defensive sectors like IT, FMCG, pharma look promising even now and have attracted the MF houses as well. The large-cap stocks are hitting new highs in this treacherous market and may continue on their path. Those companies with 100% FDI in the retail sector under FMCG, exemption of import tariffs on Indian drugs under pharma and IT companies betting on digital transformation can be good bets going forward. Unless banks and metals recover, there would be no charm in the major indices.
