Watch out for that Bubble
Avolatile week saw markets begin an expected phase of correction. The Nifty fell to 9,300 levels but later bounced back above 9,600. Sentiment was initially dampened by escalating tensions between India and Pakistan and the downgrading of China’s sovereign credit ratings by Moody’s. However, the Narendra Modi government’s third anniversary celebrations seem to have lifted the mood among investors. Mid-cap and small-cap indexes underperformed, both ending 1 per cent lower. On the sectoral front, healthcare and realty indexes lost 11 per cent and 3 per cent respectively while FMCG and automobile indexes extended their winning streak.
The much anticipated OPEC meeting ended in disappointment as the group failed to come up with a more audacious plan to reduce global oil supply, and prices fell 5 per cent as a result.
The week marked the completion of three years in power for the Narendra Modi-led government. The Nifty index has gained more than 29 per cent during this period, led by automobile and financial services sectors. The broader markets have fared even better with a 64 per cent surge during this period. The government managed to introduce key reforms like FDI in insurance and a bankruptcy code. However, bad loans still remain a big worry and employment generation is low, compounded by job losses in the IT sector.
Sugar stocks gained after the union cabinet approved a 10.6 per cent hike in the fair and remunerative price (FRP) for sugarcane to Rs 255 for 2017-18. Defence stocks were in focus after the government approved a new defence policy aimed at engaging the Indian private sector in the manufacture of high-tech defence equipment.
On the corporate results front, pharma major Lupin’s quarterly net profit nearly halved from a year ago, and the company also warned that its US revenue may extend declines over the coming year after it lost exclusive rights to sell generic versions of a pair of blockbuster diabetes drugs in its biggest market. Sun Pharma also lost ground after its subsidiary Taro reported weak numbers. It further warned investors that sales could decline in the coming year amid downward pressure on generic drug prices in the US and regulatory issues at one of its biggest factories.
On the winning side, Tata Motors reported better-than-expected Q4 numbers on strong sales in its Jaguar Land Rover business, but its Indian operations weighed down the company’s overall revenue. ITC too reported a good set of Q4 numbers, posting its highest profit growth in five years. However, volumes were under pressure on weakness in bulk trade and rural markets.
On the global macro economic data front, US manufacturing PMI dipped to an eight-month low while services PMI rose to a four-month high. The ECB published its latest Financial Stability Review report in which the bank suggested that debt sustainability concerns had risen over the past six months amid a potential uptick in yields.
For the coming week, investors will keep a close tab on the arrival of monsoon rains which is expected to hit the southern Kerala coast by the end of the month. The recent market rally is likely to sustain if monsoon rains are normal.
Some of the prominent results expected in the coming week are BPCL, Coal India, NTPC, L&T, PFC, Power Grid, Hindalco and M&M. Automobile stocks will remain in focus as these companies will start unveiling monthly sale volume data for May. PSU OMCs will also be watched as they undertake their regular fuel price revision toward the end of the month.
On the macro front, India’s Q4 GDP data will be announced on Wednesday. Growth had slowed to 7 per cent in Q3 after growing 7.4 per cent in Q2. Manufacturing PMI data for the month of May will be announced on Thursday.
The volatility witnessed in the past week, where a number of mid-cap stocks lost more than 20 per cent of their value in a short span of time, shows that any upcoming fall in stock prices could be sharp and drastic without giving investors an opportunity for profit-booking. Though markets recovered sharply this time, valuations are extremely stretched and maintaining the momentum on the basis of liquidity will lead to a bubble.
A sharp fall could also lead to liquidity drying up as players turn cautious. Market mood swings could be severe and maintaining a sober head is getting difficult even for veteran players.
(The writer is a stock market analyst)