Market outlook for the next week (December 11 to December 15)

11 Dec 2023 , 07:29 AM

WHERE WILL THE BIG MONEY COME FROM?

It is said that any stock market rally is built on four pillars viz. valuations, liquidity, growth, and scepticism. Valuations are at around 21 times for the Nifty on past four quarter rolling earnings, which his only going to get more attractive as growth picks. If you look at the positive surprise in GDP, IIP and core sector; it is only going to translate into quicker growth for revenue and profits of Indian companies. Scepticism is still there as investors still believe that the US could hike rates and funds could again flow out of India. With valuations, growth and scepticism in place, the only piece in the riddle is liquidity for the Indian markets.

Where will the massive liquidity come from? Firstly, as US rates peak out, the next few quarters could see a huge reversal of flows to emerging markets (EMs). India would be one of the biggest beneficiaries. Secondly, the commitment upgrade from Temasek on India investments is just the tip of the iceberg. In the coming months, you will get to see a slew of such upgrades by some of the major long-only funds in the world. Then there is the domestic mutual fund liquidity that is likely to flood the market in the form of a surge in SIP flows. As of November, they are already at Rs17,000 crore plus per month. RBI is not tightening much from here, nor are other central banks. So, the global pool of liquidity is also going to be robust. That completes the 4 pillars and they point to big money flows.

TWO WEEKS THAT CHANGED THE COLOUR OF THE MARKETS

It is not often that you get to see two weeks that have been so significant that it changes the entire perception of India as an investment destination. To an extent the last two weeks have been the period, when a lot of things have come together to boost the India equity story. Here are the 7 key factors that changed the colour of Indian markets in just 2 weeks.

1. To be fair, it all began with the US data towards the end of November. Q3 GDP was already robust at 4.9% as per the first advance estimates and now the second estimate had upgraded it further to 5.2%. That not only addresses the big question mark over hard landing, but also means that big order flows could again come India’s way. The other aspect of the US boost was the PCE inflation that the US announced for October 2023. It came 40 bps lower at 3.0% and it clearly showed that the US inflation was slowly and surely moving towards the 2% target. At least, the US economy was in a situation where growth was better than expected and inflation was lower than expected. That not only calls of further rate hikes, but also means that the spill-off benefits of US growth should start manifesting for the Indian economy too.

    

2. India GDP story was the big revelation towards the end of November. For the September quarter, the Q2FY24 GDP came in at a robust 7.6%. The street had been expecting GDP to grow at 6.8% with the most optimistic estimates coming in at 7.0%. The actual GDP growth in Q2 was nearly 80 bps higher than the street estimates, which is huge. This also raises the prospects of full year GDP growth, but surely confirms one thing. India will continue to be the fastest growing large economy in the world for second year in a row. More importantly, the GDP growth was driven by manufacturing, construction, utilities, and mining; all having deep externalities for future growth of the Indian economy.

    

3. At the end of the day, growth is not just about GDP, but about the high frequency indicators and how the government runs a tight ship. Both were in evidence in the previous week. For October 2023, the core sector growth flattered at 12.07%, marking the fifth month in a row core sector growth stayed above 8%. In fact, in two of these five months, the core sector growth was above 12%. In a sense, the government capex thrust is paying off. But, more importantly, core sector is a high frequency indictor that has a weightage of 40.27% in the IIP basket. Hence, a sharp growth in core sector has positive tidings for future growth in IIP and GDP. On the subject of fiscal prudence, the fiscal deficit estimate for FY24 appears to be on track as of end October and it looks like the government will not only meet, but even better fiscal deficit at 5.9% of GDP in FY24.

    

4. In a market like India, politics and economics are never too far apart. The assembly elections for key states announced the outcome on December 03, 2023 and the vote was decisively and overwhelmingly in favour of the ruling NDA government. While the investors normally tend to be apolitical in their approach, they do insist that the reforms process should be non-negotiable. With the NDA claiming 3 key states in the Hindi Belt, it almost looks like a referendum ahead of the general elections in the middle of 2024. For the investor community, continuity means that the ongoing reforms process continues at the same clip and that is music to the years.

    

5. If there was one data point in the last two weeks that defined the shift in sentiments in the market, it was the surge in FPI flows. In the previous week to December 01, 2023, FPIs infused $2.20 billion into equities with traction seen in equal measure in primary markets and secondary markets. In the current week to December 08, 2023, the FPIs infused another $2.01 billion into Indian equities. In fact, FPIs have infused $4.95 billion into Indian equities in the last 4 weeks, of which $4.21 billion came in just the last two weeks, representing 85% of the total flows in just two weeks.

    

6. Perhaps, the most important factor that contributed to the opinion shift in the current week was the monetary policy announced by the RBI. The RBI held the repo rates at 6.5%, which was along expected lines and the inflation estimate for FY24 at 5.4%, which was also along expected lines. This ensures that the RBI does not intend to hike rates from current levels, purely because it does not have any reasons to do so. But, the biggest aspect of the monetary policy that excited the markets was the 50 bps upgrade of full year GDP estimate for FY24 at 7.0%. An upgrade to real GDP estimates with static inflation, is a dual push to the growth story. 

    

7. While the current week was a relatively quiet period for IPOs, the previous two weeks saw a slew of big ticket IPOs, that not only got huge subscriptions but also delivered stellar post-listing performances. This provides the FPIs two parallel vehicles to participate in the Indi story. On the IPO story, it was about 5 major IPO listings during the previous week on the IPO mainboard. Tata Technologies gained 140% post listing while IREDA, Gandhar Oil Refinery and Flair Writing Products gained between 50% and 70% post listing. All these IPOs also got substantially oversubscribed, despite the bunching IPOs, showing that there is substantial appetite for the right IPOs. That should be an exciting story for FPIs as they have been looking at a robust IPO market.

The above factors broadly explain the sharp turnaround in the India investment story. They also explain why FPIs are back in droves and the markets are scaling new highs. One can argue that oil was also an issue, but that is something that is still in a state of flux, despite the recent fall in prices. 

STOCK MARKET TRIGGERS FOR COMING WEEK TO DECEMBER 15, 2023

The coming week is likely to be a data heavy week, both in the US markets and also in terms of critical India specific macro data. Here are the key triggers that will drive the direction and colour of the market in the coming week to December 15, 2023.

• It has been a phenomenal week for the indices. The Nifty & Sensex gained +3.46%, Nifty Next-50 gained +4.38%, the  Mid-cap index rallied +2.35% and small cap index closed +1.16% higher. The week was about large caps and with the Nifty near to 21,000, it is already in uncharted territory. If Nifty can hold above 21,000; then the only next resistance would be at 21,500. Small caps and mid-caps were relatively quiet this week, amidst the large cap rally, but should catch up in this week. That could be the source of action in the coming weeks.
• The one big event in the coming week will be the last US FOMC policy meeting and statement of 2023. Broadly, the indications are that Fed will hold rates in the range of 5.25% to 5.50%, but the guidance will hold the key. For now, the divergence between the CME Fedwatch and the Fed stance is too large and that is confusing markets. Markets will hope for some convergence on this front. In addition, the Fed will also present the long term Fed guidance on interest rates, inflation, labour data and GDP growth over the next 3 years and also for the long term.

   

• This will be the tale of two inflations; with both the announcements coming on the same day. The US consumer inflation for Nov-23 will be announced on December 12, 2023 and the broad market expectation is that the inflation should taper between 10 bps and 20 bps. However, the more optimistic voices are expecting inflation to fall below 3%. On the other hand, the India CPI inflation is expected to spike in Nov-23 to about 5.6% from the level of 4.87% last month. The culprit, once again, will be food inflation.

   

• India’s Index of Industrial Production (IIP) will be announced on December 12, 2023 and Bloomberg pegs it to cross 10% this time. The WPI inflation (producer inflation) is also expected to bounce to positive, and that means manufacturers should get more remunerative prices. That is good news. 

   

• Trade deficit data for November 2023 is likely to taper from $31.5 billion to $23.5 billion in November on better export performance. This is likely to be positive for the current account deficit (CAD) levels, which should hopefully stabilize around the 1.5% mark. Brent Crude is at $75/bbl and that would hold the key to how the trade deficit can be contained within reasonable limits.

   

• FPI flows will be watched closely after 2 weeks of frenetic inflows . FPI flows may take a breather after $4.22 billion was infused into Indian equities in the last 2 weeks. One positive for the FPI flows would be that IPOs are likely to be back this week. The IPOs of DOMS Industries and India Shelter Finance will open this week, and more date announcements of IPOs are likely. For FPIs, that assures a good supply of quality paper.

   

• Finally, let us look at the key data points from the US markets which would be keenly watched this week. Some of the major data points on the radars of the analysts and investors include Fed policy statement, US CPI inflation, API crude oil inventories, initial jobless claims, retail sales, US industrial output, business inventories, US PMI flash etc.

Overall, the coming week is likely to see positive outcomes from the data flows; both on the domestic and the global front. The assumption is that the Goldilocks advantage for the Indian economy should continue in the coming week also.

NIFTY NEXT TARGET IS 21,500?

With Nifty in uncharted zone, if 21,000 is broken, the next credible resistance is at 21,500 only. In addition, with the VIX still low at 12.47 levels, the market undertone will continue to be a buy on dips; with sharp up-moves. Even the Sensex is now just a stone’s throw from the 70,000 levels and we could see that happening this week. It will all about the cumulative effect of data flows in the coming week.