Market outlook for the next week (03-Jun to 07-Jun)

4 Jun 2024 , 10:07 AM

STORY OF SECTORAL INDICES IN THE WEEK TO 31-MAY

The week to May 31, 2024 can be best described as a week that opened with a whimper and closed with a bang. We are talking about news flows and not about the market performance. The GDP data, fiscal deficit data and the exit poll outcome came after the markets had closed for the week. Hence, we may get to see the impact only in the coming week. However, it must be remembered that the table below captures data before anything was known about FY24 GDP, FY24 fiscal deficit or the outcome of the exit polls. This data reflects political uncertainty during the week, the elevated VIX at over 24 levels and the uncertainty on the macro data front.

Sectoral Index	Weekly Returns	Index (31-May)	Index (24-May)
Nifty PSU Banks	0.37%	7,386.00	7,359.05
Nifty Banks	0.03%	48,983.95	48,971.65
Nifty Private Banks	-0.33%	24,224.10	24,303.50
Nifty Realty	-0.42%	1,019.40	1,023.65
Nifty Financial Services	-0.61%	21,718.30	21,852.30
Nifty Consumer Durables	-1.19%	35,130.20	35,553.35
Nifty Mobility	-1.69%	19,862.12	20,203.62
Nifty Logistics	-1.99%	22,307.14	22,761.01
Nifty Healthcare	-2.06%	11,795.10	12,043.50
Nifty Metals	-2.06%	9,723.60	9,928.40
Nifty MNC	-2.09%	28,550.80	29,159.45
Nifty Infrastructure	-2.12%	8,668.00	8,855.90
Nifty FMCG	-2.42%	54,107.35	55,449.15
Nifty CPSE	-2.75%	6,587.90	6,774.15
Nifty Oil & Gas	-3.06%	11,625.00	11,992.15
Nifty Energy	-3.31%	40,255.50	41,634.65
Nifty India Digital	-3.42%	7,540.25	7,807.55
Nifty IT	-4.25%	32,386.10	33,824.30

Data Source: NSE

Here are key takeaways from the tabulation of weekly sectoral returns above.

• Let us start with the macro picture for the week to 31-May. Out of the 18 key sectors, only two sectoral indices gave positive returns viz. Banks overall and PSU banks. The remaining 16 indices gave negative returns for the last week to May 2024.
• The positive returns in banks and the better-than-peer returns of the rate sensitives was on the back of the record RBI dividend paid out to the government. That is expected to temper bond yields and boost bank valuations. Out of the 16 sectors giving negative returns; a total of 4 sectoral indices fell more than 3% in the week while 10 sectors fell more than 2% in the week.
• On the downside, the worst performer was the IT sector followed by oil & gas. It is clear that the FPIs have been selling heavily in these sectors where the short term outlook appears to be slightly clouded.

The sector story was negative in that 16 out of 18 sectors ended lower for the week. But, the more important underlying trend is that there is a quiet shift back to good old banks, which still have the highest weightage in the index and can make a big difference.

WEEK THAT WAS; THE GOOD, THE BAD AND THE UGLY

For the latest week to May 31, 2024, political uncertainty prevailed, VIX was above 24 and the FPIs net sold equities to the tune of $424 Million. FPIs were cautious, but the weekly performance of the market does not cover the key data points announced on Friday and Saturday. These could be game changers. Here is a quick look at the big data and news announcements in the week.

• We obviously, begin with the outcome of the exit polls conducted on Saturday evening. Remember, these are just exit polls and the actual political numbers will only be known on Tuesday. The exit polls have predicted a thumping win for the ruling NDA combination for the third time in a row; with possibly over 400 seats. More importantly, the ruling NDA has made critical forays into states like Odisha, West Bengal, and Andhra Pradesh; where they had limited presence in the past. We still need to await the actual poll results on Tuesday
• FPI selling for the week stood at $424 Million. It is nowhere close to the frenetic selling in previous weeks, but it was disappointing as it came after FPI were net buyers in the prior week. Above all, FPIs were jittery ahead of key macro data and the political outcome of elections. FPI shorts in Nifty futures have gone up sharply in previous week.
• The big positive surprise in the week was the Q4 GDP growth and the full year GDP growth for FY24. As per data put out by MOSPI, the Q4FY24 GDP growth came in at 7.8%, against street estimates of 6.5%. The full year GDP growth for FY24 came in sharply higher at 8.2%. This positions India as the fastest growing large economy (GDP more than $1 Trillion category) for the third year in a row. That is hardly a mean achievement. The FY24 GDP data is likely to lead to a slew of upgrades to FY25 estimates and we should get a clearer picture in the upcoming full budget in July 2024.
• Oil prices, a key swing factor for market performance and FPI flows stayed subdued at under $82/bbl. There is the OPEC meeting and that is expected to be more accommodative towards the African members. Most African members of OPEC have been demanding greater production quotas to make the best of higher prices. OPEC may not want a situation where its supply quotas keeps prices under pressure and other non-OPEC countries make the best of the price rally in oil.
• The other big positive in the week was the fiscal deficit for FY24 at 5.6%. That is a full 20 bps lower than the revised estimates in the interim budget; and 30 bps lower than the original estimate at 5.9%. With GDP likely to be robust and tax revenues buoyant in FY25, the government will gain on the numerator and the denominator. The big bet now is that the RBI bumper dividend at ₹2.11 Trillion will push the government to announce a fiscal deficit of under 5% for FY25 and under 4.5% for FY26. That is fiscal prudence.
• Core sector of the 8 key infrastructure sectors for April 2024 came in higher at 6.2%. In addition, the previous month core sector growth was upgraded by 80 bps, which bodes well for core sector growth in future months. The big hope is also that part of the RBI largesse on the dividend payout would be used to prop up capex growth from 11% as stated in the interim budget to closer to 20% in the full budget in July. That will surely have a multiplier effect on core sector growth. The big core sector growth drivers in April were electricity, coal, steel, and natural gas.
• There was some good news on the monsoon front too. The onset of rains in Kerala was earlier than expected this year while the overall estimate of the Met Department is of normal monsoon in the range of 96% to 104% of the long period average (LPA) in 2024. It has positive ramifications for agricultural output, food supplies and food inflation too.
• The US announced second estimate for Q1 GDP and also the PCE inflation for April 2024. Q1 GDP was downsized 30 bps from 1.6% in the first estimate to 1.3%. The positive side of the story is that Fed tightness has been working and should now facilitate rate cuts. The PCE inflation was steady at 2.7%, and core inflation at 2.8%. Food inflation fell but energy inflation spiked sharply on the back of the Red Sea crisis.

With positive cues from GDP, exit polls and from the fiscal deficit, here is what the stock market investors can look forwards to in the coming week.

STOCK MARKET TRIGGERS FOR COMING WEEK TO JUNE 07, 2024

Here are some of the key stock market triggers for the coming week to June 7, 2024; that could influence the colour and direction of the markets.

• Nifty closed -1.86% down, Sensex -1.92% lower, and the Nifty Next-50 lower by -2.18%. The hit to frontline indices was due to poll outcome since the trading for the week closed before the GDP data or the exit poll outcome was known. The fall in mid-cap index at -1.37% lower and small cap index at -1.10% was relatively subdued. However, the big story next week will be how the markets react to the late week news flows.
• This week, the stock markets will react to the GDP numbers and the fiscal deficit numbers; both of which were substantially better than expected. The Q4-GDP at 7.8% and FY24 GDP at 8.2% are likely to be a big trigger for markets. In addition, the fiscal deficit for FY24 has come in at 5.6%, which is 20 bps lower than the interim budget estimate of 5.6%. That is a sign of fiscal prudence and could eventually also lead toa rating upgrade by the agencies.
• Exit poll outcome to favour the market rally on Monday, although the actual results would be known only on Tuesday. Exit polls have projected 400 plus seats for the NDA combine with signals that they have made key forays into new states. That is likely to be seen as a vote for the reforms process. Of course, the FPIs may still wait for the actual poll numbers to be announced, but the risk is that with huge short positions, they may be forced into a short squeeze. VIX may also see tapering in the week.
• RBI monetary policy will be announced on Friday with status quo expected on the rates front. However, we could see positive upgrades to GDP growth for FY25 and lowering of inflation considering the reduced fiscal deficit estimates. While the RBI may wait for the full budget in July, it is very likely that the RBI may seriously consider changing its monetary stance to indicate that rate cuts could happen in a pre-emptive manner.
• In macroeconomic data, the PMI manufacturing and the PMI services for May are likely to be out this week, with both likely to give positive cues compared to April. Markets will also watch out for the indications coming from the auto sales wholesale numbers for May 2024 as it could set the tone for the week.
• The big focus will shift to the budget presentation in mid-July. Of course, the final call will only be taken after the actual poll results are out on Tuesday. Marekts are already pencilling in a big bang budget wherein the government (if elected back) may use the budget as a platform to usher in major reforms across the board. IPO action has been tepid but could now pick up momentum.
• Finally, let us look at global data points. Key data points for the US include PMI, Construction, API stocks, Jobless claims, Q1 Balance of Trade, non-farm productivity, wholesale inventories. For ROW, data points include Q2GDP, ECB rates, HCOB, retail sales (EU), PMI, household spending (Japan), and PMI and balance of trade (China).

For now, the political narrative will still drive the markets. Remember, there are supportive economics too on the GDP and fiscal deficit front.

PARTING THOUGHTS ON NIFTY AND SENSEX NEXT WEEK

For the coming week, there are 3 things to watch out for, and which would determine the context for the future direction of the market.

• The big story will be whether the VIX sobers after the election outcome. It has stayed above 24 levels through the week, even as Nifty and Sensex have faced sell-on-rises pressure. Watch out for aggressive short covering by FPIs who have piled shorts.
• For the Nifty, 23,000 now becomes the decisive level. If Nifty holds above 23,000 with volumes, then the next target would be 23,500 and 24,000. However, frenetic short covering could make most of these estimates look rather inane and outdated.
• For the Sensex, the level of 75,000 still holds the key. Like in the case of the Nifty, even in the case of Sensex, if the election outcome is similar to the exit polls, then expect very rapid short covering in the markets. That could become the trigger for the next big rally.

The undertone of the market could shift decisively this week. A clear mandate will mean no political doubts for next 5 years. However, we still need to await the final election outcome on Tuesday. Investors prefer a growth agenda, bold reforms, and fiscal prudence. If Indians are lucky, they may get all of these, and more!