Market outlook for the next week (December 18 to December 22)

17 Dec 2023 , 01:20 PM

IS THIS ALL ABOUT THE FOMO EFFECT?

For starters, FOMO is a colloquial usage for the Fear of Missing Out. This is very common in financial markets. First, investors are negative on the markets. As the markets really further, they gradually turn sceptical. However, as the markets continue to defy gravity, it is the peer pressure that catches up. It is tough to see your neighbours seeing their portfolios soar by 10% in a month, when you money is not going anywhere. This applies to institutions too. It must be really difficult for investors to see a fund like GQG Investments see its India portfolio appreciate by 80% in less than 7 months, when most of the other FPIs may still have continued to remain in a state of ambivalent bliss. That is what FOMO all about.

Otherwise, how do you explain FPIs infusing $6 billion in just 3 weeks into Indian equities. Nothing much has changed for India fundamentally, except for the fact that the US Fed is showing signs of turning dovish. The point is that there is a fear of missing out in the large institutional investors too. After all, these fund managers have to also show results. An India portfolio was always supposed to be a high-risk portfolio with substantial accent on timing the market. It is hard for fund managers to explain how they skipped such a massive rally, and that too at such a frenetic pace. FOMO has been driving markets in the last two weeks and, for all you know, it may continue to drive the markets in the coming weeks too.

SOMETHING FUNDAMENTALLY ALSO CHANGED THIS WEEK

FOMO can explain the swing flows but not the full extent of the market spike. There is surely something that has influenced the markets fundamentally. Here are 7 such factors. 

1. The big change in the week was the US Fed policy. For the first time, the Fed appeared to be giving a clear indication that it was done with hawkishness. To an extent, the Fed is right. Its goal has been substantially achieved. It has managed to control inflation from above 9% last year to around 3% this year. That is a huge achievement. More importantly, this was achieved without risking a hard landing for the US economy. But that was not the big story. The big story was that the Fed has now guided that it will cut rates by 75 bps in 2024 and another 100 bps in 2025. That is a full 175 bps lower and clearly sets the direction for the Fed rates. That led to a surge of flows into India as the inflation control was achieved with GDP growth in Q3 at 5.2%. That is something quite unbelievable, but it has been done and that was a big trigger for the markets.

    

2. The week was also about the tale of 2 inflations. Yes, we are talking about US inflation and India inflation. For starters, India CPI inflation for November 2023 was higher than in October by 68 bps at 5.55%. However, the truth is also that it was lower than the expected level of 5.7%. Food inflation was expected to go up, but these are temporary cycles and not structural problems. Also, the US inflation came in 10 bps lower at 3.10%, opening the doors for the PCE inflation to fall below 3%. That is only likely reinforce the dovish intent of the US Federal Reserve.

    

3. Growth was the other big story in the week and we are referring to one of the components of economic growth. After the India GDP for the second quarter flattered on the upside at 7.6%, the RBI also raised its GDP growth estimate for FY24 by 50 bps from 6.5% to 7.0%. In another affirmation of all round growth this week, the IIP growth for October 2023 almost doubled MOM to 11.7%. One can argue that it was on a negative base, but the good news is that mining and manufacturing grew at above 10% while electricity grew at above 20%. That IIP basket is a key input for the GDP basket, especially the manufacturing GDP, which is why it assumes importance. 

    

4. Any talk of market triggers is incomplete without talking about FPI flows. Last week, the FPI flows stood at $1.95 billion. In the last 3 weeks, FPI flows have been $6 billion and largely contributed to the frenetic rally in the Nifty and Sensex. FPI flows in the previous weeks used to be dominated by IPO flows while secondary market flows were tepid. The last two weeks have been entirely dominated by secondary market equity flows from FPIs, which shows that these FPIs are nibbling away at stocks in the secondary market. That is a sign of long-only funds back in business. In the first half of December, FPIs have infused more than $5.1 billion into Indian equities and another $1.1 billion into Indian. Surely, December 2023 promises to be a record in terms of FPI flows.

    

5. The twin factors of crude oil and the Indian rupee cannot be overlooked here. Crude oil prices stayed subdued at around $75/bbl during the week. While the US inventories were under pressure, the OPEC cuts also put upward pressure on the price of crude. However, the big swing factor in the week was the supply from non-OPEC economies like Brazil, Canada, Norway, Kazakhstan, Azerbaijan, Mexico, and China. These countries account for 22% of oil output and 25% of oil exports. If the US is also added to that list, then the non-OPEC group becomes very significant and this group is driving prices of oil lower with their supplies. Subdued oil prices combined with a dovish Fed also means that the rupee strengthened to close at 83.02/$, one of the best closing levels in recent weeks. The strong rupee helps FPIs to protect their dollar returns.

    

6. The combination of low US bond yields and US dollar index also helped Indian markets. During the week, the US bond yields fell below 4% and the US dollar index trended towards 102 levels. This was a clear indication that the global shift was away from the dollar. That is normally the first signal for investors with substantial investments in dollar assets to gradually move towards EM assets. What we have seen in the last 3 weeks, and especially the recent week, is largely an outcome of these two macro variables.

    

7. Towards the end of the week, the trade data for the month of November was announced, which came with some key positives. After trade deficit touched a historic high of $31.4 billion in October, the trade deficit fell to $20.5 billion in November 2023. Exports were flat, but the sharp fall in imports was triggered by lower oil prices and tepid gold imports. Both are long term positive. Above all, the combined trade deficit of merchandise goods and services combined, has fallen by nearly 70% over the previous month. That gives hope that the current account deficit (CAD) should be kept in check under 2% of GDP, something that will be positive for the Indian rupee.

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. Apart from these, IPOs were also a key factor. However, in recent months, the centre of gravity of FPI flows shifted from the IPO markets to the secondary markets. But, more about that later.

STOCK MARKET TRIGGERS FOR COMING WEEK TO DECEMBER 22, 2023

The coming week will not be as data heavy as the last 2 weeks, although a lot of Christmas week data in the US will be front-ended to this week. The big story would be whether the Nifty and Sensex can sustain their new highs. Here are the big triggers for the coming week.

1. The Nifty and Sensex are at lifetime highs with the Nifty above 21,400 and the Sensex above 71,400. They are in uncharted territory. Last week, the Nifty and Sensex gained nearly +2.33% each while the Nifty Next-50 closes +2.66% higher. In addition, the Nifty Mid-cap index closed +2.67% and small cap index closed +3.35% higher, giving a signal that the action in the coming week may once again veer towards the small players.

    

2. RBI MPC minutes to be announced on Friday will be the big event of the coming week. This especially assumes importance in the aftermath of the Fed stance shifting towards a more dovish approach and also spelling out rate cuts timetable. RBI minutes will give a granular picture of whether the RBI is also likely to shift its stance to dovish, although that may not be crystallized in the minutes of the December policy.

    

3. Even as the lower dollar index has helped the rupee to strengthen, the coming week could see the rupee gaining heft and going below 83/$ as the positive trade data is also likely to rub-off this week. The trade deficit was sharply lower and the overall deficit for November is 70% lower than October, with positive ramifications for the current account deficit as a percentage of GDP.

    

4. FPI flows will be in focus once again this week after $6 billion got infused in last 3 weeks. The month of December already saw $5.1 billion of inflows into equities and another $1.1 billion in debt; with 2 more weeks still to go. The Brent crude prices staying around $75/bbl is also likely to be salutary for the Indian rupee.

    

5. After the sharp fall in the current week, the markets will be closely watching the US bond yields and the US dollar index in the coming week. Last week, the US bond yields fell below the 4% mark while the dollar index has corrected down to the 102 levels. Both these factors have been instrumental in the rupee gaining heft to $83.02/$ and we could see rupee gain further, unless the Yen carry trades start unwinding next week.

    

6. In big US data flows, two  sets of data are being front-ended to this week due to Christmas holidays. The US final estimate of Q3 GDP will be out early in the coming week. After the second estimate upped the US Q3 GDP forecast to 5.2%, sustaining that itself would be positive. Also, there are expectations that the US PCE inflation may dip below 3% after a long gap, almost ratifying the dovish stance of the Fed. 

    

7. The coming week promises to be a busy week on the IPO mainboard too. Apart from listings of DOMS Industries, India Shelter Finance and Inox India; the coming week will also see 8 mainboard IPOs opening during the week. In addition, the SME IPO space continues to be robust as ever. 

    

8. Finally, let us look at other major global data points. The US data focus will be on Q3GDP, PCE inflation, Housing starts, Building permits, API stocks, current account, and durable goods orders. In other data points, the EU focus will be on inflation, current account, and construction; while focus of Japan data flows will be on BOJ Policy, Trade, and Inflation. The UK data flows will be focused on inflation, PPI, GDP, and retail sales. 

Overall, the coming week is likely to see positive outcomes from the data flows; both on the domestic and the global front. 

NIFTY NEXT TARGET IS 22,000 AND SENSEX 75,000

With Nifty in uncharted zone, above 21,400 and the Sensex above 71,400; there are no real technical barriers and the F&O data also appears to be ambivalent. The consolation is that the VIX is still low at 13.33 levels, so the market undertone is likely to remain a buy on dips. The next big targets will be 22,000 for the Nifty and 75,000 for the Sensex and there does not seem to be any stops in between. For now, it looks like the bulls are likely to retain the upper hand in the equity markets.