Volatility to remain ingrained as key events unfold
It is often said that the stock market is driven by the emotions of fear and greed. On Dalal Street, the former appears to be prevailing over the latter for the time being, and that was not sending any good signal for the local bourses during the initial part of the week. The fear was induced by a post from the investigative news portal Cobrapost, the website known for investigative journalism, which claimed that it would reveal ‘the anatomy of India’s biggest financial scam’. On Tuesday, Cobrapost revealed the scam, alleging that the primary promoters of DHFL have been found to have siphoned off more than Rs 31,000 crore of public money. As a result, the stock hit over a four year low and tanked by over 33 per cent since Monday. The sentiment was also jittery as investors were spooked by Essel Group founder’s inability to bring in fresh shares as collateral to make up for the stock price crash and, as a result, the stock of Zee Entertainment and the stocks associated with Essel Group crashed. The five listed companies of the group saw their combined market capitalisation erode nearly by Rs 11,000 crore. Investors turned wary of the companies with high levels of promoters' pledged shares and the universe of stocks where the leverage against promoters' holdings were high paid hefty price as their stock prices nosedived. Despite this double whammy, markets witnessed a sharp pullback rally on Thursday.
Talking about the global market scenario, after initial hiccups, the US markets gained momentum as the US Fed chose to maintain status quo on rates in its meeting concluded on January 30. The Fed rates will stay at the current level of 2.25-2.50 per cent. More importantly, the Fed gave a more dovish stance hinting at a patient approach to future rate hikes and also a gradual reduction in tapering of its bond portfolio. Also, the investors welcomed some encouraging corporate earnings. The technology giant Apple's latest results met Wall Street’s diminished expectations, while Boeing topped the expectations. Going ahead, market participants would take cues from the high-level trade talks between the US and China. Despite the scepticism and the practical difficulties of a trade deal, the top trade officials of the US and China will most probably try to thrash out a trade deal to end the internecine trade war. One of the main items in the agenda includes bridging the gap between China’s intellectual property practices and the US expectations. The US and China need to reach a deal before March 2 to avoid the next rounds of tariff hikes from taking effect.
On the domestic front, in the coming days, a host of events are likely to unfold, beginning with the interim budget 2019 which is scheduled on February 1, auto sales figures for the month of January, Nikkei Manufacturing PMI, Nikkei Services PMI and the RBI interest rate decision which is scheduled on February 7. The CPI inflation for December 2018 came in at 18-month low of 2.19 per cent and this was close to the lower end of the inflation band that the RBI is happy with, but this low inflation has been achieved on the back of weak oil and food inflation. If the government plans a massive farm loan waiver package and rural investment programme, then the rural inflation would pick up quite rapidly. Moreover, oil continues to be the joker in the pack and, in recent times, it has seen tremendous volatility. We believe the RBI may not cut rates in February, but it may look to shift its stance to neutral.
All in all, though we expect volatility to remain ingrained in the coming week on the back of the key events, we believe a calm would prevail after the storm, as Nassim Nicholas Taleb has said ‘when an investor focuses on short term investment, he or she is observing the variability of the portfolio, not the returns-in short, being fooled by randomness.
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