Volatile Times Ahead Of Diwali

Ideally, it would be the last quarter that India Inc. reports such encouraging PAT numbers and going ahead, there could be a normalization as such high growth in profitability isn’t likely to sustain.

Oct 30, 2020 05:10 IST India Infoline News Service

Global markets as well as domestic markets were caught on the back foot on news of stringent lockdowns in Germany and France due to rising Covid cases and uncertainty due to US elections. Sentiments took a U-turn mid week and markets turned from neutral to negative. All eyes are on the coming week as elections draw closer.

The Indian Government is trying to revive the pandemic-stricken economy but lacks the firepower, their long term goal of strategic disinvestment to fund the deficit has gone into disarray, so now to compensate, PSUs have started resorting to the age old tool of share buybacks which would help return some money to shareholders including their major beneficiary the government. This move would possibly provide an effective exit strategy to the shareholders and increase their liquidity buffers. The buyback season is expected to offer support to markets especially the PSUs which would find buyers at lower levels.

Coming to the ongoing earnings season, mainly all corporates reported growth in their bottom line. This can be attributed majorly to the dramatic reduction in corporate tax rates announced on September 20, 2019. Ideally, it would be the last quarter that India Inc. reports such encouraging PAT numbers and going ahead, there could be a normalization as such high growth in profitability isn’t likely to sustain. Mr. Markets have a habit of overreacting to short-term circumstances and it is likely to signal intermediate tops post the result season ends.

Event of the Week

Global stock markets plummeted mid-week on resurgence of Covid cases resulting in lockdowns in the European countries such as France and Germany. It appears that the lockdowns this time would be as stringent as the previous ones and this will be a big jolt to the economies who are already struggling to keep their feet on the ground amidst all the GDP contractions and inflationary pressures. Market participants should be cautious and remain vigilant on such possible bouts of severe outbreaks as Indian markets more often than not mirrors global indices in times of uncertainty. Investors should remain cautiously optimistic in the current uncertain environment.

Technical Outlook

Nifty50 closed the week on a negative note posting a bearish candle on account of negative cues from global indices as well as being overbought in the short term. Almost all major sectoral indices closed negative led by Nifty metal and auto on the downside with Nifty VIX index registering a breakout from the consolidation zone of three months. We believe a retest of support of rising channel on the weekly chart is quite probable in the upcoming week and break down below the support will damage the bullish structure of the uptrend and may trigger a fall up to the next major support of 11350. Immediate support and resistance in the short term are now placed at 11350 and 11750 respectively.

Expectations for the Week

Domestic markets are expected to sentimentally imitate their global counterparts in the coming week especially since the US election is a major event. Until then, bourses could remain lackadaisical as no considerable delivery based buying or selling is emerging at current levels which likely suggests that markets would remain range bound. Buyers could then look for entry points at lower levels in anticipation of sudden knee jerk reactions. In the banking space, private sector appears well staged to be a part of the next rally as they have managed to cut their deposit rates at a higher pace than their lending rates when compared to their PSU peers. Investors are advised to keep their shopping list ready for the next week and embrace buy on dips strategy in frontline quality stocks. Nifty50 closed the week at 11642.4, down by 2.4%.   

The author of this article is Ms. Nirali Shah, Senior Research Analyst, Samco Securities

The views and opinions expressed are not of IIFL Securities, indiainfoline.com

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