Informist Poll

Global woes may weigh on Nifty 50 for rest of August

Informist, Wednesday, Aug 14, 2024

By Anjana Therese Antony

MUMBAI – Renewed uncertainties on the global front could keep the Nifty 50 index under pressure during the remaining part of August, even as strong domestic inflows into Indian shares due to robust long-term macroeconomic fundamentals could keep losses limited, according to analysts. Experts believe that the possibility of a recession in the US, uncertainty about the trajectory of interest rates, unsettled geopolitical tension in West Asia and other neighbouring countries, and the slowdown in earnings growth of domestic companies may weigh on investors' sentiment in the short term, according to analysts.

The Nifty 50 index is expected to find support at 23800 points, according to the median of estimates from 12 broking houses. This support is 1.4% or about 344 points lower than today's closing level and 1% lower from the one-month low of 23893.70 points it hit on Aug 5. The index has fallen 3.2% so far in August after two consecutive months of gains.

Woes in the US, coupled with the geopolitical tension in West Asia and the recent unwinding in yen carry trade, weighed on the Indian market recently. An Asia and global fund manager survey conducted by BofA Global Research showed that fund managers were holding higher levels of cash after having reduced overweight positions in some stocks, and global growth expectations have also come down.

The global yen carry trade started accelerating from January 2023, with the Japanese currency depreciating 27% to 162 per dollar during this time period, Elara Securities said in its report last week. About $10.3 bln, or 23%, of the yen flows came to Indian funds and 33% to the US, making them the two biggest recipients of the flows, it said, adding that the current yen denominated holding in India is around 2.2%.

Though investors gave a sigh of relief after positive comments from some officials of the US Fed and Bank of Japan last week, analysts believe it is premature to turn optimistic, especially as global worries have not settled yet. "The key debate is still US recession risks. Our US economics team continues to expect a soft landing with the Fed (US Federal Reserve) only cutting rates to 3.625% by end-2025," Morgan Stanley said in a report on Tuesday.

The increasingly-bearish approach of foreign investors has also been a factor of concern, analysts said, with FIIs increasing their short positions in index futures to 48% as of Tuesday from 35% on Jul 31. They also offloaded shares worth $1.73 bln in the cash market in August till Monday, but net purchased $2.98-bln worth of equities in 2024. In July, they had net bought shares worth $3.35 bln.

The recent unrest in Bangladesh also caused some knee jerks for a few companies, including Marico and Emami. However, experts do not anticipate it to have a major impact on the overall domestic market, except for a few sectors, such as fast-moving consumer goods. In a post-earnings report about Marico, Nuvama Institutional Equities said, "We remain concerned about Bangladesh in Q2FY25 (Jul-Sep) ... Other FMCG companies have highlighted a significant adverse impact in Q2 (Jul-Sep) sales in Bangladesh due to massive protests".

Meanwhile, India's inflation data, a key metric tracked by the Reserve Bank of India to make decisions on interest rates, fell to a 59-month low of 3.54% in July from a four-month high of 5.08% in June, according to data released by the National Statistical Office on Monday. This was also lower than the 3.7% expected by experts and lower than the RBI's 4% target.

"We expect CPI to trend higher for FY25 than the RBI estimate of 4.5%, with the bulk of the disinflation path being contingent on vegetable prices," Vikram Kasat, head-advisory at Prabhudas Lilladher, said in a note Tuesday. The RBI's concern about elevated food inflation is resulting in higher inflation expectations and spillover into other components. Hence, a rate cut in India is further away than expected, Kasat added.

The RBI governor, on multiple occasions, had reiterated that the central bank will not look at interest rate decisions of the US Federal Reserve, rather it will focus on the domestic inflation data which should fall and remain at the 4% target. On Thursday, the RBI kept the repo rate unchanged at 6.50% for the ninth consecutive time and retained the 'withdrawal of accommodation' stance.

"Though India's position today is far more resilient on the economic front, which could have allowed a slight rate reduction to test the water on inflation and exchange rates, but RBI has taken a safer bet and decided to wait for rate reduction by the third or the fourth quarter of this year," Umeshkumar Mehta, chief investment officer at SAMCO Mutual Fund, said in a note following the RBI policy announcement. Stock markets will continue to consolidate in the meanwhile, he added.

If the Nifty 50 stages a recovery, if global developments and sentiment become favourable, it will face stiff resistance at 24775 points in August, as per the median of estimates. This is about 631 points higher than today's closing level of 24143.75 points. Five out of the 12 brokerages expect the index to cross the 25000 hurdle this month, which it had first crossed on Aug 1 to a record high of 25078.30 points.

EARNINGS, SECTOR

The growth in June quarter earnings were the slowest in the last seven or eight quarters, but a rebound is seen in the September quarter, Vinit Bolinjkar, head of research at Ventura Securities, said. The growth would be supported by economic growth, good rainfall, and a likely reduction in interest rates, Bolinjkar added.

The fast-moving consumer goods pack is likely to be in the spotlight this month, too, backed by a good monsoon, expectations of improvement in rural demand, and the anticipation that the worst is behind for the sector. FMCG stocks have borne the brunt of weak monsoon and demand, and lower sales volume for more than a year, which also affected their financial performance. The sector also gained investors' attention in June after the government, during the Union Budget, announced capital allocation for rural development and infrastructure as well as for agriculture and allied sectors.

Similar would be the case with information technology players, which gained strength on expectations that the demand environment will improve within a few quarters, though a sharp change is not expected for the current financial year. However, management comments suggest that the worst is behind, and financial performance will be better in the quarters to come.

The government's push on infrastructure development is likely to keep sectors in construction, engineering, and capital goods in focus. In addition, the government's thrust on localisation of defence manufacturing may retain the focus on defence stocks as well, according to analysts.

Experts said the financial performance of banks was disappointing for the June quarter, with lenders continuing to face challenges on the deposit front. "While credit growth levers remain strong, banks continue to face challenges in deposit mobilization...We expect another quarter of slight pain from a smaller quantum of NIMs (net interest margins) for most banks before expecting stability in H2 from now on," Naveen Kulkarni, chief investment officer at Axis Securities PMS, said in a note last week.

Following are the support and resistance levels for the Nifty 50 index for June, based on inputs from 12 brokerage houses:

End

US$1 = 83.94 rupees

With inputs from Team Informist

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