Budget to set the tone for markets

Unnerved by the Hindenburg research report on Adani Group, persistent selling from FIIs, shift of hot money to China, jitters over the Union Budget and subdued results from major corporates; the domestic stock markets posted the biggest weekly loss since the week ended December 23 2022, and closed at four-month closing low. BSE Sensex shed 1,290.87 points or 2.12 percent to close at 59,330.9 and the Nifty fell 423.3 points or 2.34 percent to end at 17,604.35 levels.

The BSE Small-cap index declined 3.5 percent and the BSE Mid-cap Index shed 2.6 percent. FIIs have net sold more than Rs9,300 crore worth of shares in the past week. The total outflow till date in current month stood at Rs29,000 crore, the highest monthly outflow since June 2022. On the contrary, DIIs have bought over Rs7,000 crore during the week, taking the total monthly purchases to Rs23,400 crore. FPI strategy in January has been selling in India and buying in relatively cheaper markets like China, Hong Kong, South Korea and Thailand. Hindenburg Research is a forensic financial research that specializes in spotting companies around the globe that are engaged in wrongdoings and frauds and they have accused Adani Group of brazen stock manipulation and running an accounting fraud scheme for decades.

Point by point clarification from Adani group to the questions raised by the report is necessary to contain the reputational damage to the group and restore confidence of investors. Further, cascading effect of selling in the stocks of Adani Group on other segments of market is not ruled out. Union Budget is expected to be a balanced one with focus on the fiscal consolidation roadmap with the target to reduce deficit to 4.5 percent by FY26 from 6.4 percent in FY23. Robust tax collections for the current financial year may encourage the FM to allocate more funds for capital expenditure for FY24.

Focus may largely be on infrastructure (water, railways, defence, airports, roads, etc), green energy, electric vehicles and covering more sectors for PLI schemes. However, assembly elections in as many as nine States in the current year may see government focus on rural India. Minor tweaking in the tax structure for individuals and change in long-term capital gains (LTCG) tax and tenure are highly likely.Near term direction of the markets will be dictated by the Union Budget, US Fed meet outcome, FIIs outlook on markets after Budget, macroeconomic data, Q3 results, andinternational crude oil prices. From an optimist bull's point of view, it's good that the market is approaching the Budget on a lighter note, and any favourable outcome would lift the markets higher.

Major companies announcing quarterly numbers next week, include SBI, L&T, ITC, HDFC, Bajaj Finserv, BPCL, GAIL, Tech Mahindra, ACC, Coal India, IOC, Power Grid Corporation, Sun Pharma, UPL, Britannia Industries, Titan, Divi's Labs, PNB, BoB, CSB Bank, Paytm, Exide, REC, Godrej Consumer, Indian Hotels, Jindal Steel & Power, Ashok Leyland, Apollo Tyres, Dabur, Tata Consumer Products, M&M Financial Services, Manappuram Finance, Marico, Tata Powerand Sun TV Network.

Listening Post: It's going to take a lot more than a single market meltdown for small investors to chicken out of stocks. One of the biggest surprises in the first half of 2020 (Covid year) was what didn't happen: Most individual investors, despite their reputation as nervous Nellies who sell into every panic, didn't dump their stocks even when the market meltdown was at its worst.The typical individual investor is the polar opposite of the gamblers who have been grabbing headlines for day-trading stocks. While some bailed out at the bottom, the vast majority hung steadfast through one of the most frightening bear markets in decades.That suggests to me that sudden, shocking market declines—like during last week, when stocks from Adani group fell more than 20 per cent in a day—are no longer enough to shake small investors out of stocks. A few people made trades that were very reactionary. But it's not like everybody was making a rush to judgment and exhibiting really negative behaviours overall. Most people stayed with inertia. The popular belief that stocks will always bounce back has acquired the force of religious faith. Only a bear market lasting for several months or years is likely to be powerful enough to prod investors into questioning that faith.The idea that buying and holding stocks is bound to pay off in the long run "will self-destruct if ever it becomes universally believed in." Stock prices would then soar so high that future returns would have to be low. We're far from that level of euphoria. And it's going to take a lot more than one brutal bear market to break the commitment of today's individual investors. Never lose sleep over the market collapse.

Quote of the week: Markets change continuously and so must you. What worked last year, last month, or even last week may very well not work today. Investors and traders must consistently test their methods to see if they are valid. Should consistently evaluate thinking and assumptions to see if they still apply.

F&O / SECTOR WATCH

Ahead of the Union Budget, settlement week was immensely volatile and eventful. On weekly basis, Nifty corrected by more than two per cent, whereas Bank Nifty declined by more than five per cent. Sharp selloff was seen in stocks after Hindenburg research report published the concern over the debt position by Adani group.Rollovers in Nifty futures were lower at 79 per cent (last month 82 per cent), but above 3-month average of 79 per cent. On other hand, market wide rollovers stood at 92 per cent (last month 92%). Cost of rollover declined to 0.53. Highest Call Open Interest concentration was seen at 18000 strike whereas on Put side, the highest concentration is at 17000 strike. It is pertinent to observe that 17300 and 17100 strikes have seen jump in Open Interest on Put side. Bank Nifty doesn't hold significant Open Interest on Put side whereas Call writing was seen on higher levels.

Implied Volatility (IV) of Calls closed at 14.22 per cent, while that for Put options closed at 15.11 per cent. The Nifty VIX for the week closed at 14.66 per cent. PCR of OI for the week closed at 1.40. Moving below a defined range of 17800 to 18200, Nifty has immediate support at 17500 level. Breach of 17500 level may trigger further selling pressure and drag the Nifty to towards 17300-17100 levels as well. Sectors that can outperform in the December series are auto ancillaries, tyre, banking, capital goods, housing finance and metals. Volatility could grip markets on the back of upcoming Union Budget.

Led by Tata motors, auto sector was the bright spot during the week ended. Monthly auto numbers are also set to be announced on February 1. Auto stocks, including Tata Motors, Maruti Suzuki, TVS Motor, Bajaj Auto, Ashok Leyland, Eicher Motors, Escorts, Hero MotoCorp and Mahindra & Mahindra will be in focus. Industry observers are positive on the sector with expectations of double-digit growth in the commercial vehicle (CV) segment, healthy order book in passenger vehicles (PV), better tractor sales and positive 2-wheeler volume growth. Tractor volumes are also likely to be better on improving customer sentiments and finance availability. In the context of heightened volatility, stay light on positions and adopt stock-specific strategy. Stock Futures looking good are M&M, PVR, PFC, Petronet LNG, UPL and TCS. Stock futures looking weak are AU Bank, Apollo Hospitals and Torrent Pharma.