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Contrary to expectations that they will continue their losing streak in the current week, the markets staged a surprise recovery over the past five sessions. The CNX Nifty, which was quoting at 8,433 levels on May 29, dropped 5.3 per cent, or 451 points, till 12 June.
On Friday alone, the S&P BSE Sensex gained 0.7 per cent, or 200 points, to the 27,316 level while the CNX Nifty added 0.6 per cent, or 50 points, to end at 8,225. For the week, the S&P BSE Sensex rallied 891 points, or 3.4 per cent, while the 50-share Nifty gained three per cent, or 242 points.
The turnaround also comes amid a mixed set of economic data that saw retail inflation (CPI-based) edging up to 5.01 per cent in May, while annual industrial output (IIP) growth accelerated to a two-month high of 4.1 per cent in April. CLICK HERE FOR A DETAILED REPORT
For the coming week, Amar Ambani, head of research at IIFL, expects the markets to consolidate in a range, though he expects the current Nifty pullback to extend till 8,400. “Global factors, F&O (futures and options) expiry and FII (foreign institutional investment) inflows may dictate the near-term direction. Market participants will also keep an eye on how the monsoon progresses after beating IMD forecast,” he adds.
Here are three factors that led to a change in sentiment:
US Fed’s dovish stance: The US Federal Reserve (US Fed), while maintaining the status quo on key rates in its two-day meeting that ended June 17, sounded dovish on the outlook. This saw a relief rally across emerging markets, including India.
“We have maintained our December call since the start of last year. A number of ‘transitory’ factors are still playing a role. The strong dollar remains a headwind for US exporters, and the low oil price has reduced the incentives to invest in the energy sector. We expect only a modest re-acceleration of the US economy in Q2, which should delay the Fed’s first rate hike to the final quarter of the year, most likely December,” said Philip Marey, senior US strategist with Rabobank International in, a report.
According to a Bloomberg report, while the median forecast of policy makers still calls for two interest-rate increases by year-end, more officials say just one would be enough in 2015. Still more advocate a go-slow approach to further tightening in 2016. This saw a relief rally in emerging markets, including India.
Pick-up in monsoon: After projecting a sub-normal monsoon in the first week of June, the Indian Metrological Department (IMD) revised its monsoon forecast for June while maintaining a cautious view for July. CLICK HERE FOR THE STORY
Analysts say that the markets, to a large extent, are factoring in the news of below average monsoon as of now. However, a disappointment can see the markets correct again. A normal monsoon could help keep a lid on inflation and prompt the Reserve Bank of India to slash key rates going ahead.
Also Read: Have markets over-reacted to monsoon forecast?
“The news of below average monsoon, below expectation corporate earnings have been factored by the market. However, if the monsoon is worse-than-expected or recovery in corporate earnings is delayed, then the markets will correct once again, which we believe will be a great opportunity to invest,” said Nilesh Shah, managing director, Kotak Mahindra Asset Management in an interview to Business Standard. CLICK HERE FOR THE INTERVIEW
Adds G Chokkalingam, founder & managing director at Equinomics Research & Advisory: “Fears of monsoon performance were overdone as it was too early to worry. We also ignored the fact that India quite rarely had two consecutive failed monsoon in the past two decades. Over 10 per cent excess rainfall as of Thursday, expectation of continued good rainfall for the rest of this month and a substantial improvement in water storage in major reservoirs have reduced the concern on monsoon.”
However, HSBC in a recent report cautions the forecast of a weak monsoon following the heat wave in certain parts of the country should serve as a warning to policymakers, even if the first weeks of monsoon rains turned out to be better than expected.
Rally in heavyweight stocks: Rally in heavyweight Reliance Industries (RIL) also added to the market sentiment. The stock is trading at its highest level since December 2014 and has gained nearly 12 per cent in the past week to Rs 997 a share. Besides RIL, Hindustan Unilever (HUL), Tata Motors, Sun Pharma, ONGC and Larsen & Toubro, were some of the top gainers during the week, helped push markets higher.
Also Read: Here's why RIL's stock price has zoomed
Analysts remain bullish on the road ahead for RIL, especially after the 41st annual general meeting and have revised upwards their targets for the stock. Antique Research, for instance, estimates FY16/17 earnings at Rs 86/101 a share, respectively. “We value RIL on sum-of-the-parts basis to arrive at a target price of Rs 1,050 per share. We reiterate our Buy rating,” the brokerage said in a recent report.
