Markets May Rally On Positive Earnings Growth And Favourable Macros
The slow and steady steps taken by the Indian stock market bulls have pulled the benchmarks and other broader indices near to their trend reversal levels. The benchmark indices continued with their bounce-back from their major support levels, so much so that the benchmarks saw a straight nine-day rally, followed by consolidation at the higher levels with no immediate trigger to pessimistic sell-off. The ebbing cautiousness ahead of the US-China trade war and controlled inflation rate drove the markets northwards.
However, the concern on rising protectionism is expected to create a threat to the free trade policy in the long run if trade war escalates beyond the US-China face-off. However, some of the emerging markets such as India might benefit from the US-China trade war as the US might source its imports from India and other developing countries. Nevertheless, the pace of economic growth followed by the years of policy stimulus is likely to remain intact even in FY19. This is because most of the developed economies are expected to raise their interest rates amid robust growth and lower unemployment.
The rising oil prices across the globe are a major threat to the stability of the global economy. Despite higher US shale production, the demand is said to exceed the supply in 2018, resulting in lower inventories (recent figures showing 1.1 million barrel decline in inventories in the US) and thereby giving rise to the prices. OPEC and Russia are already into the production cut discussion and escalating geopolitical concerns might aggravate the situation further.
Rising fuel prices remain a major concern for India too, as it is one of the biggest components of inflation. However, the controlled food prices, specifically
the prices of pulses, are driving down inflation down. The inflation rate is easing and has eased to a 5-month low in March to 4.28% as against 4.44% in February, but more than RBI’s expectation of 4.2%. Even the IIP at 7.1% suggested better industrial activity leading to economic recovery. With this, we may expect RBI to delay hike in the interest rate for some more quarters.
For now, we have corporate earnings on our plate, which have just started with Infosys, which gave some topline recovery, but downgraded the outlook. Upcoming results would drive the markets on a daily basis and thereby we expect volatility to continue. Sectorwise, auto, IT, media, FMCG and financial services look good in terms of price recovery depicting better earnings growth. Apart from earnings, the agrobased, FMCG and durables and auto have another reason to celebrate with favourable monsoon forecasts this year. Normal monsoon would boost government purchases and, thereby, it would help the rural revenue to recover from the impact of demonetisation and GST.
All-in-all, unless the world’s two largest economies take any extreme decisions on trade, everything else looks fine and favourable for further upsurge in the markets. The domestic macros and expected positive earnings have already initiated the bounce-back, but the market is still lacking momentum on account of of geopolitical concerns. We expect a phase of consolidation to minor upside in the markets for some more sessions.
