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Disappointment in corporate earnings and the El Niño effect on the monsoon could weigh on stock performance as we head towards the crucial election result month. Escalation of the Russia-Ukraine crisis will also impact global investor sentiment.
Market participants expect the Indian indices to trade in a narrow range in absence of any big triggers. In a truncated week, investors will also eye corporate earnings closely after some blue chip names posted disappointing set of results last week. Markets will remain closed on Thursday on account of Labour Day holiday.
On the back of lower than expected earnings numbers, the BSE Sensex on Friday had closed down 0.8 per cent at 22,688, while the NSE Nifty ended at 6,782, down 0.9 per cent.
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"What we are seeing is a natural correction as markets had seen a sharp rally before the voting period started. We do not see any significant correction from these levels. Earnings have been lower than estimates in some cases and could lead to some stock-specific action," said Sudhakar Ramasubramanian, managing director, Aditya Birla Money.
Technical analysts do not foresee a rise above the 6,900-levels for the Nifty. According to them, 6,665 is a significant support-level, a fall below which, could trigger a reversal in the current upmove.
Analysts said stock-specific actions could be seen in sectors like technology, fast moving consumer goods (FMCG) and automobile. But financial stocks would continue to surge despite less-than-impressive results, as investors continued their bullish bets on the sector, they said.
Investors have been taking positions in the financial sector stocks betting on a turnaround in the economy on the back of a Narenda Modi-led Bharatiya Janata Party government at the Centre after the elections. Results of the election would be declared on May 16.
Stocks like Hindustan Unilever Ltd, Bharti Airtel and Sesa Sterlite, among others, are expected to declare their fourth quarter earnings numbers next week.
Focus could also shift into mid and small-cap stocks as blue-chips remain fairly valued, analysts said.
The El Niño effect could also keep FMCG stocks in focus, as investors evaluate its possible impact on rural growth.
Dipen Shah, senior vice-president (research), Kotak Securities, said, "The market has not yet fully factored in the El Niño effect because, as of now, it is just an expectation. But if it proves to be true, then it could be negative for the market."
But markets have already begin to factor in lower rainfall this year due to the El Niño effect.
Benchmark indices had slid on Friday after the India Meteorological Department forecasted below-normal monsoon as a result of the El Niño effect. The El Niño phenomenon refers to the heating up of sea-surfaces leading to extreme weather conditions like drought or floods.
However, some say it is too early to fully factor in the effects of El Niño. U R Bhat, managing director, Dalton Capital, said, "This is because not many have understood the implications of the event. The Met department has said there was a 60 per cent chance of the monsoon being below-normal."
Also, the brewing up Russia-Ukraine crisis is another cause of concern. So far, Indian markets have remained largely unscathed by the issue, but a blow up can impact the global markets, including India, said experts.
Markets in Europe and Asia declined last week, even as the western world threatened to impose a new round of sanctions on Russia.
"A one-day impact in these stocks will not have an impact on Indian markets. But if there is a prolonged effect then, we could see an impact on our markets. Foreign flows could see further decline, as there will be a risk-off trade," said Bhat.
Foreign institutional investors (FIIs) have been net buyers of Indian equities but have gradually reduced the pace of buying. Analysts said FIIs have already made money in the market during the pre-election rally. They are now looking at booking profits. Any significant change to this behaviour would be seen only after May 12, after the exit poll results start trickling out.
FIIs were net buyers last week at Rs 1,546 crore, including Friday's provisional exchange data.
