FIIs, global cues to shape mkt outlook for near term

Amid weak global cues including concerns over higher interest rates, Chinese slowdown, rising inflation, weakening currency and higher bond yields; Indian equity market witnessed selling for the fourth consecutive week, a first in last 15 months. The BSE Sensex shed 0.57 per cent or 373.99 points to end at 64,948.66 points, and NSE Nifty fell 0.60 per cent or 118.1 points to close at 19,310.20 points. After outperforming the benchmark indices in the last couple of months, during the week ended, the BSE Mid-cap Index shed 0.5 per cent and the BSE Small-cap index ended on a flat note. On the sectoral front, BSE Metal index shed 4 per cent, BSE Telecom index fell 2 per cent, and BSE Oil & Gas index fell 1.2 per cent, while BSE Power index added 0.5 per cent. FIIs remained sellers for the fourth consecutive week with sales of Rs3,379.31 crore, while DIIs continued to support with purchases of Rs3,892.3 crore. After three months of sustained buying with cumulative investment of Rs137,603 crore, FIIs turned sellers in August. Till date in this month so far, FII sold equities worth Rs10,925.84 crore and DII bought equities worth Rs9,245.86 crore. Indian rupee weakened past 83 mark for the first time in ten months to record lows. The domestic currency ended lower 25 paise for the week at 83.10. Sentiment also weakened as India’s July retail inflation spiked to a 15-month high of 7.44 per cent from 4.87 per cent in the previous month.

A weak monsoon condition has prevailed over most parts of India resulting into deficient monsoon in August raising fears of El Nino effect again. Global rating agency Moody’s affirmed its Baa3 rating on India and maintained the stable outlook, but warned of political issues and even cited the example of the ongoing violence in Manipur. India’s key rating weakness, remains the government’s financial situation. The rating agency feels that the Centre will find it challenging to achieve its fiscal deficit target of 4.5 per cent of GDP by 2025-26. Macro-economic indicators, trends in global stock markets, and Foreign Institutional Investors’ (FIIs) activities will be pivotal for the near term direction of the equity market. Jio Financial Services, which demerged from Reliance Industries last month, is set to be listed on August 21. It is pertinent to note that the company announced its tie up with Blackrock, world’s largest asset manager, to float a mutual fund company. Together, the partnership will introduce a new player to the India market targeting initial investment of $300 million. Watch out for disruptions in Mutual Fund and NBFC sectors.

Listening Post: A Stock Market Bubble? It’s more like a Fire

Wild market speculation can feel like an out-of-control blaze: The more it expands and the hotter it gets, the more havoc it can wreak. The stock market isn’t a bubble, but parts of it are on fire.So far in 2023, the Nifty is up 6.65 per cent only but the Nifty mid-cap and small-cap are up 20.01 per cent and 20.06 per cent respectively. Nifty PSE was one of the biggest gainer with 23.03 per cent. Also Nifty Pharma, Nifty Auto and Nifty Realty gained over 20 per cent. On popular trading apps like Zerodha, which are literally commission-free, volumes have soared to record levels. The second side of the fire triangle, fuel, is manifested in financial markets by money and credit. High inflation and low interest rates make investing with borrowed money cheaper, while paltry yields on safe savings compel people to invest in riskier alternatives. Today, with borrowed money, individual investors are conducting small “margin” trades with as little as Rs1,00,000 in a brokerage account. The third side of the triangle, heat, is supplied by speculation. When prices go up, more people buy, inflaming prices even more and attracting another rush of speculators. That lures in naive buyers who think making money is easy. But hedge funds and other institutions also chase those hot returns, fanning the flames even higher. It is important to note that the fire triangle has in recent years been updated with a fourth component, an “exothermic chain reaction. “Marketability, credit and speculation are necessary, but not sufficient, to start and maintain a market fire. A fourth component called a “spark,” is also needed. That can come from new technology like Artificial Intelligence, government intervention or both. The stock-buying binge of the late 1990s was sparked by euphoria over the potential of the internet.

China’s more-recent market booms have been stoked by government policies and propaganda. Most bubbles tend to be confined to a few stocks or industries. That was true in the past and today, isn’t much different. In proportion to market size—which weights large cap stocks heavily—the companies in the Nifty recently traded at 21 times expected earnings over the next 12 months. That’s about 24 per cent higher than their average over the past few years. To counteract the effect of a handful of giant stocks, however, we can weight companies equally. In that light, if mid-cap and small-cap stocks are looked at it shows, that most stocks aren’t cheap—but are hardly overstretched. I don’t see much cause for concern about overheating in relatively small areas like newly listed stocks, alternative-energy firms and several mid-cap and small-cap stocks. The bigger worry is that a fire among a few giant stocks can set the neighbourhood ablaze. Remember the crash in 2000, the broader Sensex also tumbled. Recently, smaller companies and cheap “value” stocks have started to show signs of recovery—which, if it persists, could reduce the market weight of blazing - hot giants like Tata Motors, ITC and others. That might be the firebreak that this market needs.

Quote of the week: Avoid Uncertainty. When the trend is in doubt, stay out. Avoid a trader’s market when the ultimate trend is uncertain unless the trade can be protected by a small stop and justifies the risk

F& O/ SECTOR WATCH:

Mirroring the weakness in the underlying cash market over the past four consecutive weeks, the derivative segment is witnessing shrinkage in volumes. More number of stock futures are in “ban” list these days. The Bank Nifty is also on weak wicket as compared to the Nifty over the same period. Analysing option data, the Nifty call options showed the highest open interest at the 19,400 level, while the highest open interest for put options was concentrated around the 19,300 level. Regarding implied volatility (IV), Nifty call options settled at 10.32 per cent, while put options concluded at 11.03 per cent. Additionally, the Nifty VIX, a gauge of market volatility, ended the week at 12.24 per cent. The volatility has seen a spike for third consecutive week with the India VIX climbing above 12 levels for the first time since third week of May. The Put-Call Ratio Open Interest (PCR OI) stood at 1.04 for the week. The Nifty is anticipated to trade within a range of 19,100-500 and the expected trading range for the Bank Nifty is projected to be between 44,000 and 43,800 with pivot level at 44,200. On the back of significant weakness in rupee against dollar, IT majors witnessed renewed buying interest. Rising US Treasury yields, strong dollar and weak Indian equities are all weighing on the Indian rupee. Stay invested in the sector for unexpected contrarian gains. Energy sector is on the radar of funds. After fresh stake buy in Adani Power by GQG, rumours are doing rounds that couple of big ticket M&A in the sector. Stay overweight on the sector say observers. With improved prospects for pharma, the sector witnessed a strong re¬rating in CY23. Stock futures looking good are AU Small Finance Bank, DLF, Godrej Properties, Tata Power, Max Financials, Manappuram, Syngene and Titan. Stock futures looking weak are ICICI Prudential, Gujarat Gas, Kotak Bank, Metropolis, SAIL and Tata Chemicals.

(The author is a senior maket analyst and former vice- chairman, Andhra Pradesh State Planning Board)