Govt Should Take Prompt Measures To Revive Economy And Markets

The month gone by, i.e. July, was no less than a nightmare for the investors as Nifty recorded its worst July since 2002 and closed nearly 6 per cent lower for the month. The pain in the broader markets was further aggravated with the Midcap and Smallcap indices plunging 9.81 per cent and 10.94 per cent, respectively, during the month. If one investigates what contributed to such pessimism on the D-Street, it all started in the first week of July with the announcement in the Union budget. The budget imposed higher tax surcharge on the super rich, which adversely impacted the FPIs and, ever since, the FPIs have been on a selling spree and recorded an outflow of over Rs 16,000 crore worth of equities in the month of July alone. The July outflow is also the highest among the emerging markets, followed by Brazil. Adding fuel to the fire was the ongoing Q1 earnings season which continued to be circumspect as most of the companies showed growth worries on the topline. Banking, auto and FMCG companies have seen distinct demand pressure during the quarter. Adding to the woes of the Indian auto sector, which is already reeling under crisis, was the recent draft notification proposing to increase registration charges on vehicles. The recent macroeconomic data coincided with more bad news for Asia’s third largest economy as the growth of eight core industries dropped to 0.2 per cent in June. Overall, things remain tricky and we could only hope for some improvement, probably from H2FY20 once we see the bounty of the harvest and festive season demand. Talking about the global markets, specifically the US markets were dancing to the optimistic tune of trade deal with China and hopes of Fed rate cut. As widely expected, the Fed delivered a rate cut of 25 basis point in over a decade and despite the rate cut, the Dow and S&P 500 registered their biggest daily percentage drops in two months on Wednesday. Blame it on the comments of Federal Reserve Chair Jerome Powell, who said that the easing was ‘not the beginning of a long series of rate cuts’, which poured cold water on expectation of a lengthy easing cycle. Also, the latest round of trade negotiations between the US and China ended with no progress.

As we see it, the market sentiments are still pessimistic and it would make sense to avoid highly leveraged positions and keep books light with a few hedged positions. We feel the market has much work to do to be on the bullish side again this time, as disappointment from the earnings has spread over the index major also. So the preferred strategy is to be watchful. However, we may see a rebound due to oversold nature of the markets, but going long is not advisable until we see the Nifty showing faster retracement above the 200-DMA and confirming the upside the following day. Investors will do good to preserve capital during down-trending times like these. The sentiment on the D-Street needs to see a turnaround, but how could this happen? The market expects some prompt and concrete measures from the government to lift the economy in the near future. Meanwhile, the government has a tough task to maintain its fiscal prudence as the fiscal deficit in the first quarter ended June 2019 has widened to Rs 4.32 trillion, which is 61.4 per cent of the budgeted estimate for FY201920. However, the markets in the near term may take a sigh of relief and find light at the end of the tunnel as the India’s central bank (RBI) could deliver a rate cut in its upcoming monetary policy meet. This reminds us of a quote from Ralph S Marston Jr ‘Just because the road ahead is long, is no reason to slow down. Just because there is much work to be done, is no reason to get discouraged."