Editorial

Earnings And State Elections To Drive The Markets

The global market bears had no need to go out hunting for their sustenance as October came up with several catastrophic events, specifically from the world’s largest economy, that delivered a bounty to the bears. Taking advantage of the situation, bears emerged as the apex predators in the game, due to which the US markets gave up all the gains of 2018, adding more fuel to the fire already set across the global bourses. The US had initiated the trade war and is apparently seen burning in its own fire as the industrial companies have cautioned rising material costs that would eventually dampen the margins. Further, the current corporate results have been a mixed bag in the US and the economy fears an end to the potential rally in the earnings environment, which was earlier helped by tax cuts implemented in the previous year.

Secondly, realty and allied shares tumbled in the US in the wake of a decline in new home sales numbers, which hit 2-year low at 5.5% to 553,000 in September. The improved construction techniques, labour scarcity, higher input costs and mortgage rates have hiked the prices of homes, resulting in decreased demand and high inventories. Thirdly, the ongoing concerns over Italy’s budget plan fearing a default and the Brexit negotiations have refrained the markets from continuing with the bullish reversals after taking supports at crucial levels. Lastly, the series of rate hikes by the Fed, alongside the rising tensions of the escalating crude prices persists. Saudi Arabia’s expected retaliation on its journalist’s murder and the ongoing concerns on Iran sanctions scheduled next month are factors that are keeping the oil prices elevated.

Coming over to the domestic markets, despite some relief in the crude prices and a bounce-back in the value of rupee from its record low level of 74.49 hit on October 11, Indian markets do not seem to be cheering. The FIIs are continuing their selling spree and have reported negative net equity investments of Rs 20914 crore in October, which almost duplicates the September numbers. The DIIs are purchasing but at a slower pace at Rs 16930 crore, a bit higher than Rs 12504 crore in September. However, it is just that markets are struggling for a bounce-back, with many companies posting Q2 earnings in line with expectations, especially the IT giants and private banks.

Our benchmark indices carry high weightage of NBFC’s and hence the growing concerns about the liquidity of the NBFCs are pulling the indices down. The capabilities of the lenders to rollover the debt and fund the rising demand for cash ahead of the festive season would be keenly observed. Further, the cash deficit has widened to Rs 1.4 lakh crore in the latest week of October, indicating a worsening liquidity position. The RBI has tried to respond to the pressure via bond purchases, buying Rs 36000 crore in October, which is more than combined purchases in the last three months.

We may see some silver lining in the form of Q2 earnings, if the upcoming results beat expectations or at least come in line with the expectations. That would at least keep the markets consolidating at the lower levels. We are at the doorstep of state elections and any win for the BJP would bring some cheer in the markets. This bounce can be utilised for exiting from weak companies and averaging for the strong ones. Otherwise, we do not suggest any fresh buying for now and we stick to the bottom-up approach for averaging.



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