Market outlook for the next week (27-May to 31-May)

27 May 2024 , 09:10 AM

STORY OF SECTORAL INDICES IN THE WEEK TO 24-MAY

It is said that the stock markets can be notoriously unpredictable. We saw a live demonstration of that in the previous week. The week was still filled with political uncertainty, fourth quarter results were nothing to really write home about, global geopolitics continued to be fluid, and the Nifty VIX was elevated at 21.7 levels. Amidst all these headwinds, the Nifty and the Sensex made new highs. While the Sensex got past the 75,000 mark, the crossed the 23,000 level, albeit briefly. It was a week in which all the major sectors gave positive returns, although the extent of returns varied. The table below captures the gist of the weekly returns of key indices.

Sectoral Index	Weekly Returns	Index (18-May)	Index (10-May)
Nifty CPSE	5.86%	6,774.15	6,398.90
Nifty Metals	3.88%	9,928.40	9,557.95
Nifty PSU Banks	3.51%	7,359.05	7,109.25
Nifty Energy	3.31%	41,634.65	40,302.50
Nifty Oil & Gas	2.99%	11,992.15	11,644.40
Nifty Infrastructure	2.69%	8,855.90	8,623.55
Nifty Realty	2.66%	1,023.65	997.10
Nifty Mobility	2.01%	20,203.62	19,805.58
Nifty Banks	1.78%	48,971.65	48,115.65
Nifty Financial Services	1.74%	21,852.30	21,478.30
Nifty Logistics	1.72%	22,761.01	22,375.37
Nifty Private Banks	1.55%	24,303.50	23,931.65
Nifty Consumer Durables	1.38%	35,553.35	35,068.25
Nifty IT	1.33%	33,824.30	33,381.85
Nifty MNC	1.28%	29,159.45	28,791.90
Nifty FMCG	0.70%	55,449.15	55,064.70
Nifty India Digital	0.19%	7,797.35	7,782.55
Nifty Healthcare	0.17%	12,043.50	12,023.50

Data Source: NSE

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

• Let us start with the macro picture for the week to 24-May. Out of the 18 key sectors, all sectors gave positive returns. The traditional alpha favourites like PSU stocks and metals were back among the top gainers. This was despite the headwinds in the market overall.
• The leading sectors were CPSE, metals, PSU banks, energy, and oil & gas. All these sectors took the lead with 3% returns or more in the week. Out of the 18 sectors, a total of 8 sectors gave returns of more than 2%, while 15 sectors gave returns of more than 1%. CPSE stocks were largely led by the rally in defence stocks while metals was on the back of revival in growth globally. China demand also played a role.
• On the downside, none of the sectors gave negative returns. However, FMCG, Digital India and healthcare sector gave below 1% returns in the week. Basically, in the weekly rush for alpha, the defensives were overlooked by most investors in the week.

The sector story was quite positive in the sense that all the sectors gave positive returns in the week. But, the more important underlying trend is that there is a quiet shift back to the aggressive alpha plays. Investors are playing key Indian sectors for the alpha story.

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

For the week to May 24, 2024, FPIs were net buyers to the tune of $744 Million. That is a welcome turnaround after 5 consecutive weeks of selling when FPIs offloaded equities to the tune of $6 Billion. Here is a gist of the key drivers in the week.

• Two things have been plaguing Indian markets in the last few weeks; political uncertainty and high VIX. Both were present in ample proportions in the current week also. However, the markets chose to ignore these irritants and look at the bigger picture of an Indian economy that was transitioning from a $3.5 Trillion economy to a $5.0 Trillion economy. In one of the longest polling programs in the democratic world, India has completed 6 rounds of elections and the last round is to happen on June 01, 2024, followed by the actual poll outcome announcement on June 04, 2024.
• Another big event in the week was the sharp fall in the bond yields. For the week, the 10-year benchmark bond yields dipped below 7% for the first time in 2024 to close at 6.98%. The trigger for the sharp fall in bond yields came from the larger than expected dividend distribution by the RBI to the central government at ₹2.11 Trillion. We will dwell on this point in detail later.
• The US Fed published the minutes of the FOMC meeting held on May 01, 2024 during the recent week. The Fed had already decided to maintain status quo on rates in the range of 5.25% to 5.50% in its FOMC meet; and that had already been communicated as part of the policy statement. Markets were expecting the minutes to throw light on the trajectory of rates. However, the Fed continued to adopt an ambivalent stand, just indicating that it would also be open to rate hikes should sticky inflation so demand.
• The week saw a sharp recovery in the Indian rupee. In the last two weeks, the USDINR has recovered from 83.55/$ to the current level of 83.06/$. This is a sharp hardening of the Indian rupee. While it was partially caused by the flat dollar index, the rupee strength also stemmed from the reversal of FPI flows into positive territory, as well as the larger than expected dividend by the RBI to the government. It has the potential to reduce the fiscal deficit further for FY25, and that is what markets are enthused about.
• The biggest news of the week was the dividend of ₹2.11 Trillion to be distributed to the government of India. While the RBI has paid the dividend for the year FY24, the government will consider it as resources for FY25. The latest figure of ₹2.11 Trillion is the highest dividend payout by the RBI ever. Last year it was ₹87,415 Crore and in the interim budget, the government had pencilled RBI dividends of ₹1.02 Trillion, which also includes PSU bank dividend. According to economists, there are 2 possibilities. Firstly, the government could cut the fiscal deficit by another 20-30 bps. Alternatively, it may raise the capex outlay growth from 11% to 20% for FY25.
• In a positive news for the government, it appears that the government plan to target PLI for boosting domestic manufacturing and exports appear to be working perfectly. For the just concluded fiscal year FY24, the exports of smart phones emerged as the fourth largest export item in value terms. The domestic phone manufacturing business has gained from the China Plus One policy and big guns like Apple have shifted bulk of their manufacturing to India.
• Finally, what is the scene on the IPO front. The week was relatively quiet as most IPOs are currently on hold on account of the impending election outcome. It was a two-way street in the IPO market. On the one hand, Hyundai India outlined plans for a $3 Billion IPO (larger than LIC IPO). The valuation targeted is around $25 Billion. However, on the downside, the era of digital IPOs appears to be moving in spasms, with OYO Rooms, putting off its IPO plans. It will now raise money through debt placements. After the recent fiascos with digital stocks, OYO wants to avoid the IPO route.

With the Q4 results season done and dusted, the action point now shifts to the outcome of the exit polls on June 01, 2024; followed by the actual poll results on June 04, 2024.

STOCK MARKET TRIGGERS FOR COMING WEEK TO MAY 31, 2024

Here are some of the key stock market triggers for the week to May 31, 2024; that could influence the direction of the markets next week.

• For the week, the Nifty closed with gains of +2.19%, Sensex up +2.02%, and Nifty Next-50 up +2.87%. It was largely an outcome of the ₹2.11 Trillion RBI dividend to the government; and the likely salutary impact on the fiscal deficit. Smaller indices were relatively subdued with the Mid-cap index up +1.59% and the small cap index closing just about +0.07% higher. The interest has shifted more towards the macro plays.
• The coming week will be the last week of this results season. Key large cap Q4 results this week include LIC, NMDC, IRCTC, Tata Steel, Apollo Hospitals, Muthoot Finance, General Insurance Corp. Among the mid-cap results this week are NALCO, Natco Pharma, LMW, Amara Raja, ABFRL, Cummins, Mazagon Dock, IPCA Labs, and BDL.
• The lag effect of the RBI dividend of ₹2.11 Trillion will be felt in the coming week also. Remember, the mega dividend has pulled down the 10-year bond yields to below 7% for the first time in 2024. The hopes are that lower bond yields will also result in a boost to equity valuations. We have to wait and watch.
• With the election outcome on June 04, the exit polls will give the first indication after the last round of elections on June 01, 2024. The exit polls will be crucial as they will set the tone for the markets in the coming week.
• In big data announcements in the coming week, the Q4 GDP growth, and the full year GDP growth for FY24 will be announced on Friday. With over 8% GDP growth in the first 3 quarters, Q4 is likely to be subdued at 7%, so full year GDP will hold the key.
• Two other domestic data points will be out in the coming week. This includes the core sector growth and the fiscal deficit for March 2024, with FY24 full year fiscal deficit. Core sector growth will be a good indicator of the capex effect. IN addition, the real focus will be on the fiscal deficit data to see of 5.8% of GDP has been met in FY24.
• The week will see two key data points in the US. The second estimate of US Q1 GDP will be put out this week. Also, the PCE inflation for April 2024 will also be announced, which is the inflation based on personal consumption expenditure (PCE). The combination of the GDP data and the PCE inflation will set the tone for the rates trajectory in the US markets for calendar 2024 and 2025.
• Crude prices will be a major focus this week, having fallen to $82.12/bbl at the close of the week. US inventories again showed accretion in the previous week and that is likely to keep energy inflation levels subdued. On the IPO front, not much action is expected on the mainboard, with just one listing.
• Major US data points in the coming week include Fed speak, Q1 GDP, PCE Inflation, Fed member speak, API crude stocks, initial jobless claims, Fed balance sheet. On the ROW (rest of the world) markets, key data points include Unemployment, ECB Speak, CPI, Eurogroup Meetings (EU), CPI, IIP (Japan), Composite PMI (China); and Governor Speak and housing price index – HPI (UK).

The political story to look forward is the last phase of elections and the exit polls this week. In India, it is politics that really sets the tone for the economy and the stock markets.

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 the spike in the VIX. It has stayed above 20 levels for the third week in a row and closed the week at 21.7. Ironically, the Nifty and Sensex touched lifetime highs when the VIX was at 21.7.
• 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 on the Nifty. Of course, the VIX at 21.7 levels and the risk of a startling outcome in exit polls are risks to the market.
• For the Sensex, the level of 75,000 is decisively out of the way. The Sensex is likely to face some resistance at 76,500 levels as the next level to watch, and beyond that it could have a free move all the way to 80,000. However, a lot will depend on the poll outcome, which will only be known on June 04, 2024.

The undertone of the market has shifted to a buy on dips market, which is surprising with the VIX so elevated. However, the election outcome will hold the key. Given a choice, investors will still prefer a reformist tilt, fiscal prudence, and a growth agenda.