Markets At Decisive Levels, Earnings To Help Cherry Picking
With the trade war fears fading, the Indian stock market bulls charged again only to be stuck at their decisive levels. The Banking Bears, specifically the PSUs, were seen refraining the markets from gaining ground. Thereby, despite robust macroeconomic recovery and revival in most other sectors, the banking stocks which hold higher weightage in the indices were seen offsetting a further bounce. The ongoing focus on banking frauds, increasing bad debts and ATM cash shortages for the last couple of months are casting a doubt on both economic outlook and BJP's ability to retain power in 2019 election. As the banking system had just started recovering from the impact of demonetisation and GST rollout majorly through recapitalisation, these recent developments have again interrupted their lending business.
Secondly, the US 10-year treasury yields hit 3% upside after four years with the US dollar appreciating from its multi-year lows, bewildering bourses across the globe, specifically the emerging markets. The flight of foreign capital to the US assets brought in a sell-off in the Indian bonds and equities fueled by the FPIs and FIIs. The Indian Sovereign Bonds witnessed steepening which otherwise happens when RBI cues liquidity tightening. As it is, RBI is expected to apply rate hike in its June policy review meeting. Bond investors are also impacted by the additional threat arising from fiscal deficit where the combined deficit in FY to March 2018 stood at 2.9% of the GDP. This will also give rise to debt repayment burden from the government worsening the position of banks. A further threat is the rising global oil price which would force the government to maintain the fuel prices at elevated levels with little or no tax cuts, thus raising the fiscal deficit.
The crude oil surge amid production cuts and demand glut would linger in FY19. This might give rise to inflation which is now kept under control because of the eased food prices. Further, worsening of the borrowing capabilities may stall economic activity, resulting in a decline in the manufacturing and service activities.
Nevertheless, the expectation of a normal monsoon comes as a silver lining which would at least help maintain the food prices in the coming quarters. This would, in turn, boost the allied sectors of agriculture, auto and encourage rural spending. Further, IT, pharma and metal sectors may see some more upside with dollar appreciation and shining US economy, of course, that's till Donald Trump keeps mum about the tariffs hikes. IT stocks have reported a recovery in their recent corporate earnings.
Q4 results would bring in volatility to the markets. However, whether the markets would retreat from the current levels to below the major support levels or bring in fresh buying in the markets to hit above their peak levels, is a matter of concern.
Yet, the results season (Q4 and FY18) would make it easy for the investors to choose the right stocks and stay away from the benchmark volatility. The sectors which have seen recovery have already discounted the better FY18 performance and may give some more upside.
