Should you worry about inflation?

Indian indices continued to remain volatile but were still well within its range. The distribution phase of the benchmark indices has definitely taken over despite a negative performance by the Asia pack especially Hang Seng, which struggled after the Chinese Government’s actions triggered regulatory fears over sectors such as technology and private education. Retail investors have turned cautious and FIIs too offloaded more than Rs. 6,900 Crs worth of Indian equities this week. July witnessed the highest sell-off since March 2020 as markets tread a rocky path with valuations at all time high & escalation in third wave concerns. Now there is still one big fear looming over the Street and that is INFLATION! But is it really a very big concern as yet? If we see the inflation during past crises such as the 2000 dotcom bubble burst or the 2008 catastrophic global financial crises, it was well in the range of 6-7%. Hence, it appears that panic around current inflation trajectory shouldn’t be considered as a danger sign as yet and there seems to be some more headroom for it to rise, before the RBI muddles with investor sentiment and raises interest rates. More so, even the Fed Chair refrained from tempering with current interest rates and emphasized that the inflation pressures are transitory.

What added to the cracks in Mr. Market this week was the lack of confidence from IMF because they lowered India’ economic GDP forecast from 12.5% to 9.5% for FY22 drawing attention to a sluggish revival of the economy because of a ravening second wave and slower than expected inoculation drive. Going ahead, a depreciating rupee and higher oil prices could be near-term overhangs for the market. But as lower interest rates continue to remain a boon for equities, any weakness in the market should be considered as a healthy correction as well as a buying opportunity for long-term investors.

Event of the week

Several big banks and shadow banks have expressed their concern about the rising stress in auto and CV loans. Unlike the first wave where only the urban market’s asset quality for these segments took a hit, this time both rural and urban regions were affected and delinquencies have spiked. This was exacerbated by reduced EMI collections as dues for these loans are generally collected door to door by collection agencies. Difficulty amplified as presently there is no market for repossessed automobiles and impounding these vehicles has minimal advantage to lenders. While surge of defaults will harm certain lenders more than others, the lenders are optimistic of a recovery in collections in Q2. But the scene can continue to remain muted as fears of a third wave looms large.

Technical Outlook

Nifty 50 index continues to trade in a tight consolidation range. Support and resistances are now placed at 15600 and 15900 levels. Even though nifty has not broken the support, but it is trading below the trendline drawn from April 2021 lows, which is also bearish. Traders are advised to maintain a neutral bias as long as Nifty does not break below 15550. A break below the support is likely to trigger a short-term correction.

Nifty50 Update 30 July 2021

Expectations for the week

The RBI’s MPC meeting is scheduled for the coming week however the expectation is that the RBI too, just like the Fed, will not hamper the repo rates so as to continue supporting impacted sectors with cheaper credit. The Governor's comments on inflation will also throw some light on to our economy and any future actions our central bank might take. Auto sales numbers, PMI figures along with the result season will continue to drive stock specific movements on D-Street. Investors can continue investing in the markets in a SIP format to accumulate quality stocks. Nifty50 closed the week at 15,763.05, down by 0.59%.

IPO party is far from over!

Indian equities started on a weak note mirroring jittery global cues but the profit booking didn’t last long as sentiments reversed by the latter half of the week. Apart from stretched valuations and inflation worries, the word on the Street is all about IPOs and how the subscriptions have hit the roof despite unreasonable valuation of certain companies. “Carpe diem” seems to be the motto of investors but what is amusing is banks and financial institutions have gained equal if not more interest than retail participants in primary markets in the recent past. Fact is they have nearly doubled their investments in IPOs and we are only over half way through the year! So far in 2021, their investments in primary issues have touched a four-year high. The story does not end here, the PFRDA is mulling over allowing pension funds to broaden their investment gamut to invest in eligible IPOs and similar primary issues with certain predefined criteria. This certainly depicts that the IPO party is far from being over, given our economy is flushed with liquidity and as the “father” of all IPOs is yet to come. With about of investments in new aged unicorns and interest garnered around IPOs, it seems India is moving towards a Private Market platform just as the Nasdaq Private Market in the US which is a venue for trading of pre-IPO shares and transactions of private company shares. Now this market in the US requires investors to meet certain wealth criteria hence it might take a while before this idea appeals to the masses of our country, who currently transact in pre IPO shares through the grey market. But there is no doubt that the heat has definitely turned up in this space.

Event of the week

As the Q1 results are underway, leading financial companies reported a dent in their performance with a rise in bad assets and provisions. What investors should make note off is if leaders of the banking and NBFC space haven’t been spared from the impact of the second wave, then the weaker smaller players will definitely have a tough time coming out stronger on the other side. These developments were effects from the moratorium period being discontinued and unless the third wave arises, the large cap clan atleast may not face significant pain. The third wave could also only delay their growth but it will certainly not derail it completely. Hence, investors should target only the fundamentally stronger companies on corrections from the financial space.

Technical Outlook

Nifty50 index closed in red for the week however the index is still trading within the consolidation range. This entire week the index remained quite volatile and tested the crucial support of 15650 to bounce quickly. BankNifty index also found cushion at 34300 levels. Market breadth shows bullish signs but trading volumes are drying up. Many European and emerging market indices are under performing or have made a lower bottom recently. The outlook remains bullish as long as we trade above 15600 levels. Any break below the said support will signal weakness in the short term.

Nifty50 Update 23 July 2021

Expectations for the week

The IPO season continues to be the highlight of the market in the coming week as 2 new issues hit the Street. Bank Nifty could remain in focus as private banks come out with their quarterly numbers. The FOMC is expected to meet in the US and all eyes will be on their borrowing plan and guidance towards interest rates moving forward. Indian bourses will take account of all these factors and deliver whipsaws on news. Traders should be extremely calculative in their moves while investors should sit tight on their quality portfolio. Nifty50 closed the week at 15856.05, down by 0.42%.

Bulls Charge Ahead, Undeterred!

Another lifetime high this week! Markets have been a dream for the investor community this past year with successive highs wherein not only the benchmark indices but even the smallest stock saw strong momentum. The trend wasn’t restricted to India alone and swept far and wide across the globe. The US and Chinese economies have been witnessing accelerated demand which added upward pressure on inflation. India, au contraire, is experiencing heightened inflation above its 6% comfort levels mainly because of an increase in fuel prices instead of pent up demand; a point to prude upon given that crude prices are expected to continue rising higher due to supply crunch. Usually, rising inflation is synonymous with growth in GDP i.e. improving economy and equities have done well when inflation is at slightly higher levels but not too high. The Fed as well as our RBI’s onerous stance on not hiking interest rates immediately very well reflects this fact.

On one hand we see inflation rising and on the other bond yields are witnessing a dip. Now when bond yields were on an upward trajectory there were varied concerns and while they are tapering the fears are different. Not only this, cautionary signs are coming from all other places too in the form of a slip in GST collections below Rs. 1-trillion mark to soaring India’s debt to GDP ratio which now stands at a 14-year high. While these macros keep oscillating from positive to poor economic outlook, what remained constant in the past year is the fact that markets paid no heed to any one macro data in solidarity and in the larger scheme of things have continued to trod along its path towards new highs. Investors who rode the rally without paying attention to short term noise greatly benefitted and doubled their returns. That is the power of staying invested through the thick and thin of markets.

Event of the week

IPOs continue to amuse investors and when it collaborates with a bull rally, the interest magnifies as promoters and PE investors benefit due to handsome valuations. Tactically, only a small portion of the issue is allocated towards retail and their excitement soars each time it gets oversubscribed, courtesy lack of supply. Valuations may raise some eyebrows but as long as promoters & PE investors are able to find a buyer willing to pay the price, they stand to benefit from the IPO. This trend holds true for both retail and institutional investors as well when they pursue IPOs for "listing gains" confident in their belief that they will find someone who will be willing to pay a premium post listing. This vicious cycle, termed the "Greater Fool Theory" implies that people are able to sell at inflated values as long as there is someone willing to buy at an even higher price (the greater fool). This cycle continues as long as willing participants continue to pump money into stocks.

Technical Outlook

Nifty 50 index closed positive for the week, however, the market is now constrained within a small range of 400 points and is struggling to take a decisive direction. Markets are trading overboughtoverbought in the short term and majority of this rally has come on a slowed-down momentum as compared to the major uptrend. 15600 zone has been established as a strong support and until that breaks we suggest traders to maintain a cautiously bullish outlook. A decisive close above 15950 may trigger a test of 16200 on the higher side.

Nifty50 Update 16 July 2021

Expectations for the week

Quarterly results are expected to pick up pace and be in full swing by the coming week. Since the country was in a lockdown in Q1FY21, a YoY comparison might seem magnified due to a lower base. Hence sequential comparison along with management insights will be more beneficial from a future growth perspective. As the benchmark index delivered a 7% return in Q1FY22 and broader indices shot one way up with valuations blowing through the roof, investors shouldn’t invest aggressively at these levels. Nifty50 closed the week at 15923.40, up by 1.49%.

Why should Secondary Markets have all the Fun?

Markets remained in a state of flux with international bourses showing signs of profit booking on overvaluation and India experiencing a volatile session after FIIs dumped equities in the latter half of the week. The overflow of retail participation, especially the amateur ones, was a result of overwhelming liquidity and lack of other alternatives. Indices have been in a range bound movement either consolidating or in a distribution phase. Net inflows into equity mutual fund schemes in June marked the fourth consecutive month of positive inflows, after eight straight months of outflows prior to March 2021. Markets hovering around new highs have not only lured the FOMO retail participants to invest but have also persuaded promoters to come out with IPOs to strike a handsome price for their share, taking advantage of the bullish market sentiment. After all, companies do ‘strike while the iron is hot!’ A record number of companies are expected to hit Indian bourses in the second half of calendar year 2021 aiming to raise about Rs. 80,000 to 90,000 Crs. This euphoria and the rate at which companies are listing in the primary market may also eventually suck away liquidity, leaving secondary markets high and dry.

But does the current excitement, mark the end of an upcycle? Markets make intermediate tops when they reach a state of excess. For now, it seems that the aggression in volumes has definitely died down and the VIX is also more or less in the same range. Hence, only if Asia and other developed equities witness a decisive correction in the coming week, will Indian markets definitely follow suit making an intermediate top. Until then, this week’s move can be assumed to be more or less a profit booking one.

Event of the week

RBI’s recent data brings out a simple observation about borrowers. There has been a rise in borrowings in the form of personal loans driven by the need to manage individual expenses during the second wave. Individuals have also resorted to availing loans against jewelry as they seek short term funds. The unlock theme has also accelerated vehicle loans. However, loan growth in the housing space decelerated, education loans have further contracted as institutions remain shut and industrial loans reported a negative growth. This shows that in the past year, large corporates and institutions are focusing on deleveraging while individuals are turning towards loans to tide through the pandemic. While the central bank remains hopeful of economic recovery with relief measures being announced and vaccination pace picking up, metropolitan branches of private banks seem to paint a different picture with credit growth at mere 1.4% YoY. This contrasting stance by Corporates and individuals is not healthy for the economy.

Technical Outlook

Nifty50 closed on a mildly negative note for the week, but it is still trading in a range-bound manner. The index has established short-term support at the 15500 zone, a break of which will raise a red flag to the ongoing uptrend. This might trigger a profit-booking move and possibly short-term weakness in the market. Until then we suggest traders maintain a bullish bias, keeping a stoploss below 15440. Immediate resistance is now placed at 15900.

Nifty50 Update 09 July 2021

Expectations for the week

The FY22 result season starts this week with TCS and other companies coming out with their first quarter numbers. Given the slow and steady recovery and outlook delivered by emerging market peers, the broad-based expectations continue to remain high from the Indian counterparts. With a largely positive overall sentiment towards Q1, investors may witness some whipsaw movement in specific stocks. However, one must not assume that all will be well from this quarter’s numbers as the base of last year was quite low due to covid lockdowns. Profit booking in some overvalued stocks can be considered on every rise going ahead. Nifty50 closed the week at 15689.80, down by 0.21%.

A Pause Before the Next Earning Season

Markets this week steadily corrected, especially the index heavy weights as FPIs maintained their profit booking stance. Investors have broken from the 2020’s defensive shackles and have increased their risk appetite. Global central banks undertook huge borrowing activities to tackle the economic contraction which triggered revival in the economic engine. As the fiscal deficit was fast expanding, India’s debt witnessed a 1,090 bps jump to 58.8% of GDP by March’21 from 47.9% in FY19. As the situation evolved, leading sectors such as Consumer Durables and Autos fell out of favour and handed the baton to Pharma, Technology, Infrastructure and Construction. India Inc. took a more conservative stance as they moved from aggressive capex and expansion towards cleaner balance sheets to cushion the impact from any future uncertainties. In fact, based on a research of 1,000 public firms, debt reduction across these companies came in at about Rs. 1.7Tn in FY21, one-fifth of FY20 levels.

FY21 may be the year of deleveraging but does that mean that most of these companies are now debt free? Not really, since they resorted to borrowing funds at lower rates by issuing bonds to repay their high finance costs - A smart tactic to benefit of the lower yields! Companies have been looking to better manage and turn operating leverage in their favour with cost control measures. They are deferring non critical capex and curbing excess operating expenses to maintain cash flows. Such prudent management of capital has been well received by investors, which have rewarded these companies with premium valuations, despite some macro-related uncertainties. Hence, a simple strategy for investors to remain in the market is to continue to hold their longs in strong players while those on sidelines can enter on healthy pullbacks, however aggressive investments in small caps should be avoided for now.

Event of the week

With an attempt to push credit/liquidity to the most-needy distressed strata of the economy, the FM announced Rs. 1.5 lakh crore of additional credit for small businesses, more funds for the healthcare sector, and loans to tourism agencies and guides. These measures surely attempt to cushion the substratum of the economy both from the demand as well as supply side. While these measures are aimed at the right direction it doesn’t seem enough to completely erase the pain, since the economy continues to remain bleak as indicated by the core sector data. India saw a 16% YoY jump in May, which is much lower than the 61% YoY jump we saw in April. As the core data points to a slowdown in recovery, India may need more support from the Govt. to recover swiftly.

Technical Outlook

Nifty50 index closed negative and remained in red throughout the week, but still it has gone nowhere. In fact, the index is finding strong demand around 15600 levels and trading in line with other emerging market indices. As long as we are trading above the current support which seems a more likely scenario, traders are advised to maintain a cautiously bullish bias and can initiate long positions around the support while keeping a stoploss just below 15560 levels. The immediate resistance is now placed at 15900.

Nifty50 Update 02 July 2021

Expectations for the week

The Q1FY22 result season is about to commence from next week with large cap IT companies announcing their results to begin with. IT services companies in US announced exemplary results as well as saw an upward revision in their outlook given strong tailwinds. Accordingly, IT stocks in India have been witnessing a strong uptrend over the past couple of weeks driven by strong earnings expectations. Therefore, investors should look for any short pullbacks post earnings as an opportune time to enter the IT sector. Nifty50 closed the week at 15722.2, down by 0.87%.

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