Editorial

Market Correction May Be A Precursor To Bigger Rally Or Trend Reversal

The much-awaited correction in the Indian stock markets is finally here with the bears taking over the control of the game. Before the correction had set in, bulls ascended warily which kept the market breadth weak and signalled their weariness at peak levels. Consequently, profit-booking in select few stocks that had kept the market momentum going ultimately dragged the markets down. Moreover, the weakness in the rupee to the current all-time low of 71.96 with the elevated global oil prices dampened the overall sentiments in the markets and the deteriorating outlook on the current account. However, the rupee depreciation, albeit a bit late, is in line with the prevailing weakness in most other emerging markets' currencies since the series of US rate hikes.

Moreover, yuan's devaluation to counter the tariffs enforced by the US, coupled with similar weakness in Turkish Lira and economic disaster in Argentina, have worsened the overall situation in the emerging markets. Not just the emerging markets, the US and China too have suffered in the trade war. The trade deficit of the US has recently hit 3-year high, along with higher deficits of China and EU. China is expected to suffer more from the war as imposing similar tariff rates with lesser number of goods would result in wider trade gap and cause bigger income loss to China.

As for Indian equities, September month began with sell-off by both FIIs and DIIs, thereby causing provisional reversal. Fear of a quick rate hike by RBI amid currency weakness has alarmed the market participants. India's GDP growth hit 8.2% in Q1FY19, registering the highest growth in two years and strongest since Q12016, surpassing GDP growth of most other major economies. However, Indian markets did not react positively, indicating doubt about the reliability of the data as the RBI forecasted 7.4% GDP growth for FY19.

Further, the release of regular macroeconomic numbers has directed the movement of the stocks and sectors. The mixed bag of auto sales numbers amid Kerala floods and postponed festive seasons dragged down the Auto index by more than 4% in September. Further, Nikkei India manufacturing PMI eased a bit to 51.7 in August from 52.3 earlier amid lesser domestic demand and drop of service PMI to 51.9 from a 21-month high level of 54.1 in July. Going forward, both the activities would be lacklustre due to slowing demand and rising margin pressures amid high cost of goods and relatively lower pace of price hikes.

Overall, if we consider the fall as profit-booking, we can expect it to give a bigger jerk to the forthcoming rally, which normally comes before the Union budget, apart trend reversal in the markets. For now, the defensives, or rather, the dollar-driven sectors of IT and pharma are still going on at optimum potential. Waiting for a bounce-back in select stocks from corrected sectors is advisable for now.

We will know the exact direction of the markets in the sessions to come. However, comparing the indices which have been uplifted by thart from the pre-election rally. However, if the top is made, the fall in high weightage stocks along with further fall in other stocks might result in e select few stocks with your portfolio would be misleading. Staying with bottom-up approach would work best in these market conditions.

 

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