 "Devangshu Datta: More give than take for markets")
The Indian stock market had rallied through the first fortnight of October but it gave back the bulk of its gains in the second half. Weak corporate results and political tension on the domestic front reinforced bearish sentiments caused by nervousness about possible action by major central banks.
The US Federal Open Market Committee (FOMC) met and that always creates trading triggers. The current palpitations are about a possible Federal Funds policy rate hike in December. The FOMC meeting left that possibility on the table though the Fed maintained status quo in rates as expected. (If you want to be contrarian, consider the possibility that the Fed will wait until the next US President is elected, a year down the line!)
Fears of a hike have led to the usual topsy-turvy assessment of US gross domestic product (GDP) data. The US economy slowed in Q3 (July-September) to an annualised GDP growth rate of 1.3 per cent, much lower than Q2's 3.9 per cent and also lower than the consensus expectation of 1.6 per cent. Most traders reckon the weak data are good since that lowers chances of a December hike.
The Bank of Japan (BoJ) has also decided to maintain status quo. The European Central Bank (ECB) is also waiting. Both the BoJ and the ECB have ongoing quantitative expansions and both currency regions are also on the edge of deflation.
The People's Bank of China has not shown such restraint, cutting rates and reserve ratios for the sixth time this year. China's economy beat consensus (6.8 per cent) by growing at 6.9 per cent (July-September) though this is lower than that of both last year and the previous two quarters. However, the central bank is said to be worried about rising bad loans and opinion is also divided on credibility of the data.
In India, the upswing in dal prices negated the feel-good factors there might have been about generic inflation data. Most of the results that have come in so far appear to be on the poor side, or at least, the market has received them poorly. Airtel, Axis Bank, ACC, Lupin, Unilever, ITC, L&T, Vedanta, Cairn, HDFC, HCL Tech etc have all suffered sell-offs post results. Bajaj Auto and Maruti have done well, however. Corporate earnings continue to be slow and uneven.
The foreign institutional investor (FII) perspective is interesting. FIIs bought in both debt and equity segments in October, with debt far exceeding equity as the Reserve Bank of India allowed investments into state government debt and increased the limit for central bonds. However, the FIIs are now close to the new quota limits on the debt front. The rupee had strengthened - it has now fallen past 65 again.
In terms of sentiment, Moody's Analytics has released a report that focuses on political tensions and suggests Prime Minister Narendra Modi should restrain his party MPs from shooting off their mouths. It will be pooh-poohed by the establishment since it says unpalatable things. Nevertheless, it is the first criticism of this government by a concern that seriously influences FIIs, and hence, worth noting.
Domestic institutions were net equity sellers although there was some buying in the November settlement. The IndiGo initial public offering (IPO) soared on comfortable over-subscription. The Cafe Coffee Day issue also managed to set allotment price at the highest point of the offer band. IndiGo, in particular, may have led to some cash being sucked out from the secondary market. Those two IPOs have put some energy back into the primary market.
Moody's Analytics also makes a point about the critical nature of the Bihar Assembly elections. If the Bharatiya Janata Party wins the polls, it will indeed improve its presence in the Rajya Sabha, and also demonstrate that Modi retains some electoral magic. A loss, on the other hand, may set off internal conniptions inside the ruling party itself. The results, due on November 8, will undoubtedly have some effect on trader-sentiment.
Traders are braced for higher margins in the derivatives market since contract sizes have been reworked up. In most cases this means about 2.5 to three times the previous margins. This move was long overdue but it will make already illiquid segments of futures and options such as stock options even harder to trade. Higher margin requirements may force some retail players out altogether. Retail tends to be absent around the Diwali period anyway, so we'll have to wait to "deseasonalise" the impact of higher margins.
In technical terms, the bear market has been "half-confirmed". The recent highs were just below 8,300 Nifty and therefore, failed to push the index above the 200 Day Moving Average. This has established a bearish pattern of lower peaks, with the previous set of peaks in the range of 8,500-plus in August. Now we have to wait and see if the market breaks down to new 52-week lows or range-trades.
The Nifty is trading at a weighted price-earnings (PE) of just above 22x (last four quarters, standalone) according to the National Stock Exchange. There's a band of strong support between 7,800 and 8,000, which corresponds to a PE band of 21.3-21.8. The index might range trade between 7,800 and 8,200 perhaps. If it breaks below that band, it is likely to test 52-week lows. A drop below 7,539 (the 52-week low) would suggest a much steeper correction through 2016.
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
