Use Short-Term Hiccups To Accumulate Promising Stocks

The financial markets witnessed a mixed bag of news flows last week. The negative news flows had the potential to cause large moves on the downside. However, amidst all this, D-Street witnessed one of the narrowest range in recent times, with major indices swinging like a pendulum. The front page news of the week was that, after a week’s delay, India’s monsoon officially arrived on the South Kerala’s coast. Also, former Chief Economic Adviser Arvind Subramanian in his latest research paper raised questions about India’s GDP growth between 2011-12 and 2016-17. According to the data released by the Society of Indian Automobile Manufacturers (SIAM), passenger vehicle sales fell 20.6 per cent in May. On the macroeconomic front, the retail inflation jumped to a seven-month high of 3.05 per cent in May, although it remained within RBI’s comfort level. On the other hand, the IIP growth for April 2019 came in relatively healthier at 3.4 per cent, which was a relief after the negative IIP growth seen in the month of March 2019. The domestic markets have managed to digest all the negative triggers and have been witnessing a temporary cool-off. Indian markets have been under performing the US stock indices by a decent margin. At the current juncture, the market breadth is a concern among the market participants as a relatively narrow breadth has been observed on Dalal Street. Not many stocks are participating and this has led to the issue of lack of decisive moves among the frontline stocks, which has resulted in failure to get past the resistance points and under performance vis-a-vis the US stock indices. 

Now, the absence of clear leadership and the consolidation in the markets had left investors puzzled as to which stocks would be good to invest under such circumstances. We believe investors should be taking a bet on the stocks of oil marketing companies and industries like paints, as a hefty correction in the crude oil prices would benefit the bottom lines of these companies straightaway. The rains gods have gods arrived, albeit a bit late, and a good monsoon would create a positive sentiment for the fertiliser and agrochemicals stocks, and hence, investors should also focus on stocks from these sectors as well. Needless to say, one should invest in companies with credible management and a clean balance sheet. 

As for the global markets, after seeing a splendid run, Wall Street lately underwent a profit-taking phase as investors are still concerned that the tense US-China trade relations could cause additional economic and corporate challenges. On the global front, investor would look forward to the FOMC meet scheduled for June 18-19. We believe a Fed rate cut is on the cards, may be not this month, but also not too far away. The recent jobs report made a strong case for a rate cut. However, we believe the Fed would hold back a rate cut and one of the prominent factors for the delay in the rate cut would be an expected meeting between the leaders of both US and China at the G-20 summit in Japan later this month. If the trade war continues and the economic data continues to be sluggish, it may prompt the Fed to cut rates sooner rather than later. Meanwhile, the US President has clearly indicated that fresh additional tariffs are ready if Chinese President Xi Jinping does not attend the G-20 meeting. The technical picture of the market continues to be clearly bullish, despite a sluggish and a range-bound week for the indices. The Nifty has managed to hold the opening gap of May 20 and it is trading above its 200 day moving average, while also being well above of the rising 50-day moving average. These short-term hiccups should be used to accumulate the emerging stocks of the upcoming rally.