Market outlook for the next week (29-Jul to 02-Aug)

29 Jul 2024 , 09:24 AM

SECTORAL STORY IN THE WEEK TO 26-JUL

The week to July 26, 2024 saw the Nifty and the Sensex closing sharply higher. While the FPIs went into sell-mode post the Union Budget announcement on July 23, 2024, the domestic players continues to be on the buy side. That was evident from the rally across large caps and mid-cap stocks. FPI flows in the week were subdued at $349 Million, but they have already infused $9.04 Billion in the last 7 weeks. Here is a quick look at how the 20 key sectors performed in the week to July 26, 2024.

Sectoral Index	Weekly Returns	Index (26-Jul)	Index (19-Jul)
Nifty Healthcare	5.67%	13,702.35	12,967.65
Nifty Automobiles	5.16%	26,250.70	24,963.35
Nifty Logistics	4.66%	24,936.17	23,826.56
Nifty Consumer Durables	4.29%	39,212.30	37,598.90
Nifty Mobility	4.02%	22,047.53	21,195.48
Nifty CPSE	3.78%	7,340.20	7,072.90
Nifty India Digital	2.98%	9,022.80	8,761.70
Nifty Energy	2.79%	43,238.30	42,062.80
Nifty Infrastructure	2.74%	9,372.25	9,122.35
Nifty FMCG	2.69%	62,728.80	61,087.90
Nifty IT	2.64%	40,977.35	39,923.30
Nifty Oil & Gas	2.51%	13,049.25	12,729.90
Nifty Non-Banks	2.17%	25,394.85	24,856.21
Nifty Metals	1.81%	9,423.40	9,256.30
Nifty MNC	1.55%	30,927.35	30,454.95
Nifty India Defence	-0.07%	7,480.40	7,485.80
Nifty PSU Banks	-0.44%	7,270.65	7,302.60
Nifty Realty	-1.69%	1,077.65	1,096.20
Nifty Banks	-1.86%	51,295.95	52,265.60
Nifty Private Banks	-1.88%	25,518.20	26,008.00

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 July 26, 2024. Out of the 20 key sectors, 15 sectoral indices gave positive returns, with only 4 sectors giving negative returns. The sentiments were broadly positive with only the interest rate sensitive stocks and the defence stocks under pressure during the week.
• Let us start with the top gainers for the week. Healthcare and automobiles led the rally with 5.67% and 5.16% gains respectively. The other important sectors that led the gains were logistics at 4.66%, consumer durables at 4.29% and mobility at 4.02%. Healthcare stocks gained after the mega deal by Mankind while autos and IT continued to rally on the back of strong Q1 results for FY25. FMCG has been a surprise package for the last few weeks as it continues to scale lifetime highs in each successive week.
• There were a total of 5 sectors giving negative returns in the week with private banks the worst hit, contracting by -1.88% on concerns over valuations and thinning NIMs. Banks overall, and realty also contracted more than -1.6% in the week. Defence continued to be week for the third week in a row, but it was a lot more stable in the latest week. Barring these 5 sectors, all the other sectors ended on the gaining side.
• With 15 out of 20 sectors giving positive returns in the week, the arithmetic average of returns of these 15 gaining sectors stood at an impressive 3.30%, while the arithmetic average of the 5 losing sectors stood at -1.19%. Compared to last week, the gains in the up-sectors are a lot more than the losses in the down-sectors. Out of the 20 sectors overall, 2 sectors reported more than 5% returns for the week and a whopping 13 sectors reporting over 2% returns for the week. On the downside, 3 out of the 5 sectors lost more than 1.6% during the week. Clearly, the rate sensitive story was under stress.

The latest week saw the domestic investors back with a vengeance in large and small stocks, although the FPIs continued to be slightly on the defensive side.

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

For the latest week to July 26, 2024, FPIs were net buyers to the tune of $349 Million. For 7 the last 7 weeks in a row, the FPIs have been net buyers in equity; infusing $9.04 Billion in the process. Here is what drove the market sentiments in this week.

• On the face of it, the full budget look to have disappointed the markets. However, scratch the surface and there were a lot of positives for the market in the long haul. For instance, the initial reaction to the budget was negative on account of the higher allocations to Bihar and Andhra Pradesh; two prominent coalition partners of the Modi 3.0 government. Despite the higher outlays for the states and for food subsidies, the government managed to further trim its fiscal deficit estimate for FY25 from 5.1% to 4.9%. One can argue that this was largely thanks to the RBI largesse of ₹2.11 Trillion as dividends; but that is par for the course. The bottom line is that this reduction in fiscal deficit comes despite higher outlays, which were largely inevitable.
• FPI flows in the week stayed positive at $349 Million. The FPIs were net buyers in the first 2 days but net sellers in the next 3 days of the week. However, it cannot be ignored that the FPIs have infused close to $9.04 Billion into equities in 7 weeks. Above all, the FPIs have infused a stellar ₹1 Trillion into debt in the first 7 months of 2024, something not seen in a long time.
• Of course, it was the capital gains tax that spooked the markets. Short term capital gains tax on equities was raised from 15% to 20% while the LTCG tax on equities was raised from 10% to 12.5%. This created the knee-jerk sell-off in the markets. However, the LTCG hit has been mitigated by a higher base exemption limit on long term capital gains from ₹1.00 Lakhs ₹1.25 Lakhs per annum. The broader positives of widening the gap between LTCG and STCG tax should sink in gradually.
• Oil was the X-factor during the week. The ceasefire talks in the Middle East (sponsored by Egypt and Qatar), as well as the weak growth numbers from China have raised hopes that oil prices should come down. For the week, the price of Brent crude fell below $81/bbl and looks set to inch below $80/bbl. Both, the ceasefire talks in the Middle East and the fears of a Chinse slowdown in oil demand are major headwinds for oil.
• The other major factor that impacted the FPI sentiments in the Union Budget was the hike in securities transaction tax (STT) on futures & options transactions. STT on option selling was hiked 16-fold from 0.0625% to 0.1%. At the same time, STT on futures selling has also been raised by 60% from 0.0125% of notional value to 0.02%. These two moves are likely to impact the futures market liquidity; as well as the arbitrage and roll cost for FPIs. The impact would be there on F&O volumes, but that is the intent anyways. SEBI is keen to curb speculation by retail investors in the F&O space.
• The US Bureau of Economic Analysis (BEA) announced first advance estimates of GDP growth for Q2-2024. At 2.8%, the advance estimate of GDP growth was double the first quarter GDP growth of 1.4%. One can argue that the GDP growth is still lower than the 4.9% and 3.4% achieved by the US in the third and fourth quarters of 2023. But that is a positive trigger for rate cuts. Growth being in the range of 2.5% to 2.8% shows that the hard landing for the US economy had been avoided. At the same time, it also indicates that growth in GDP continues to be in sync with 2% inflation target.
• The week also saw the personal consumption expenditure based (PCE) inflation announced by the US BEA for June 2024. While the consumer inflation (announced in mid-July) had fallen 30 bps, the PCE inflation fell by just 10 bps to 2.5%. Within the PCE inflation basket, the core inflation was flat and food inflation was 20 bps higher. However, the soothing of frayed nerves came from energy inflation which fell sharply by nearly 280 bps in the month. It shows that oil is getting more affordable in the US and that is critical as it was the swing factor in oil prices in recent months. If you combine the impact of the healthy GDP number and the lower PCE inflation, Fed may be all set to cut rates in September, if not on July 31. The CME Fedwatch has already assigned a 100% probability to the first rate in September, with one more cut coming in December.

Overall, it was an action packed week for the markets. The budget was short-term worrisome, but it was also long term palliative. Let us move to the coming week!

STOCK MARKET TRIGGERS FOR COMING WEEK TO AUGUST 02, 2024

Here are some of the key stock markets triggers that can influence the direction of the stock markets in the coming week to August 02, 2024.

• Let us start with the outlook for generic indices. Last week the Nifty was up +1.24%, Sensex was up +0.90%, and the NSE Next-50 up +2.87%. In addition, the Mid-cap index was up 3.33% while the small cap index ended +2.48% higher. There are two broad trends. Within large caps, rate sensitives are under pressure, but others are making up. More importantly, alpha hunting is back in smaller stocks and that bodes well for the smaller indices.
• As we enter the fourth week of Q1-FY25 results, here are the key large cap results to watch this week. The list includes ACC, ATGL, IOCL, TCPL, VBL, M&M, Maruti, CIL, Tata Steel, Ambuja, ITC, SUNP, APSEZ, Titan, and HZL. Among smaller companies, the Q1 results focus will be on HPCL, BEL, Adani Wilmar, Indus Tower, Dixon, Mankind BOB, Dabur, Thermax, Escorts, and CAMS. In addition, some of the companies like Hawkins, Naukri, Ultratech, CRISIL, Brigade, Orient Cement, Granules, and Birla Corp, among others, also have their dividend record date (RD) coming up this week.
• There are two key macro data points coming from India this week. The core sector data will be out on July 31, 2024 for infrastructure growth, although it is likely to taper from the levels of 6.3% last month. The other big data point is the fiscal deficit update for June end. This data point is important as it is likely to be benchmarked to the reduced fiscal deficit target for the fiscal year FY25 at 4.9% of the GDP.
• The July Monetary policy will be announced by the US Federal Reserve on Wednesday, July 31, 2024. The CME Fedwatch has assigned a 100% probability of the first rate cut happening in September. It remains to be seen if the Fed will take up a pre-emptive rate cut in July instead of waiting to September, although it does look unlikely. The markets will be tracking the language of the Fed on the trajectory of rates for 2024 and for 2025.
• Let us turn to the outlook for FPI flows and crude oil prices. Last week, FPI inflows tapered to $349 Million, but total infusion stands at $9.04 Billion in 7 weeks. Next week, the big question would be, how the FPIs react to the Union Budget fine print. Also, with the Middle East ceasefire talks, mediated by Egypt and Qatar, the pressure on oil prices is likely to take Brent crude below $80/bbl.
• It will be a busy week with 3 mainboard IPOs; apart from 7 SME IPOs. The 3 mainboard IPOs (Akums, Ceigall, and Ola Electric) will raise IPO capital of over ₹10,000 Crore between them.
• Finally, let us turn to the key global data points. Major US data points this week will be JOLTS, API Crude stocks, Fed Statement, jobless claims, construction spending, factory orders, Atlanta Fed GDP. For ROW, the focus will be on IIP, BOJ Policy (Japan); GDP, CPI, jobs, PMI (EU); Caixin PMI (China); and HPI, PMI, Bank of England Vote (UK).

Let us finally turn to the outlook for the Nifty and Sensex.

PARTING THOUGHTS ON NIFTY AND SENSEX NEXT WEEK

For the coming week, there are 3 things to keep an eye on.

• Last week, VIX fell sharply to the 12.3-12.5 levels; as the budget uncertainty ended. Global markets are in a state of flux, so traders have to be cautious. Markets will be comfortable and in buy-on-dips mode, if VIX stands under 13 levels.
• For the Nifty, any breach below 25,000 is the only major resistance now and breaking above that mark will open up a completely uncharted territory for the Nifty, stretching all the way up to 26,500 by the end of 2024.
• For the Sensex, it held 81,000 for the week, but the next big level to watch will be 82,000. Breach of 82,000 opens up the Sensex for a free run, all the way to the 85,000 levels, which should be a solid rally.

With the budget done, the next big trigger next will be the US Monetary policy statement. A dovish tone will surely help the markets!