Market outlook for this week (05-February 5 to February 9)

5 Feb 2024 , 06:58 AM

BUDGET UNLEASHES POWER OF FISCAL PRUDENCE

When the Interim Budget was announced, there was generally scepticism that the government would choose to play it safe. There is a general election coming up in May and the government would have to play its cards right. As Keynes had remarked many years ago, the choice between politics and economics was never easy. This dilemma gets all the more pronounced when elections are approaching. It is easy to opt for freebies and giveaways ahead of elections but they would have a fiscal cost. Fortunately, for the markets, the government decided to unleash the power of fiscal prudence. After all, pegging the fiscal deficit at 5.1% for FY25, was not just brave, it was also audacious in an election year.

Why was fiscal prudence so important to the markets. Firstly, the government learnt in the last 10 years that good economics is also good politics. Indian voters are no longer beguiled by freebies. People have tasted economic growth in the last 4 years, despite the disruption of COVID. They want to be part of a positive economic story. Secondly, fiscal prudence sends a positive message to the global investors and rating agencies, that the government was serious about fiscal prudence, irrespective of the political equations post-May.

Unleashing the power of fiscal prudence is a lot more than that. Lower fiscal deficit means lesser borrowings. Combine that with tax collection buoyancy and the Indian economy is in a sweet spot where the macro pieces are falling into place. This is also a signal that interest rates in the economy are all set to sober to more realistic levels. After all, lower rates not only reduce bankruptcy risk for corporates, but also boost the value of debt holdings of banks and global investors. Above all, it boosts equity valuations by discounting future cash flows at a lower hurdle rate. That is the power of fiscal prudence that we are talking about.

INTERIM BUDGET AND FED POLICY DEFINED LAST WEEK

The week to February 02, 2024 was an action packed week with the interim budget and the Fed policy statement. However, if we were to break it up, there were 7 specific factors that had a rather deep impact on the colour and direction of the Indian equity markets. 

1. The highlight of the interim budget this week was the sharply lower fiscal deficit projection. For FY24, the government has cut fiscal deficit estimates to 5.8%, at a time when most experts thought that even 5.9% was unrealistic. Above all, the fiscal deficit estimate for FY25 has been cut sharply to 5.1%. The street would have been happy with anything between 5.3% and 5.5%, but the actual number was a lot more aggressive and fiscally prudent. The impact of the lower fiscal deficit was already visible in the sharply lower bond yields and FPI flows turning positive in the week. 

    

2. If the fiscal deficit for FY25 was sharply lower, it came at a small cost. The cost was slower growth in the allocation to capex in FY25. In the last 2 years of FY23 and FY24, the capex had grown at an average rate of 30% plus. In contrast, the capex for FY25 is just growing by 11% to Rs11.1 trillion. However, it must be noted that this is just the interim budget and more allocations may be forthcoming in the full budget. Also, at Rs11.1 trillion, the capex is at a healthy 3.4% of GDP. One must also concede that capex has strong and longer term externalities. Hence, even the lag effect of the capex of previous years would be visible in FY25. Overall, the capex looks to be on solid ground.

    

3. Not surprisingly, the Fed held status quo on rates, keeping it in the range of 5.25%-5.50%. However, that is not the point. The status quo was expected and what the markets really wanted to know was the trajectory of rate cuts by the Fed. The Fed had indicated 3 rate cuts of 25 bps each in 2024 while the CEM Fedwatch is pegging rate cuts of 125 bps to 150 bps. However, the truth is that the rate cuts have not yet started and the Fed has not even hinted at a time table. To make things more complicated, the Fed has hinted that inflation still had a long way to go and even went to the extent of ruling out any rate cut in March this year. That means, investors have to patiently wait till May or June 2024, before they can see evidence of the first rate cut by the US Fed. 

    

4. FPI numbers saw a turnaround in the week with positive inflows of $126 million into Indian equities. FPIs had taken out $4 billion in the 3 previous weeks and had infused $10 billion in the 9 weeks prior to that. Overall, the good news  is that the FPIs infused more into debt in 2024 than they took out from equities. Hence, on a net basis, the FPIs are still net buyers for the year 2024 as the debt inflows have more than offset the equity outflows. Debt flows are buoyant due to high real rates offered by Indian bonds as well as the inclusion of the Indian debt paper in the global JP Morgan and Bloomberg benchmark bond indices. The inclusion in the index alone is expected to drive foreign inflows of close to $30 billion, but that will come over a period of time. 

    

5. When you talk about oil, the Red Sea crisis cannot be too far behind. For the week, the Red Sea crisis appeared to be abating after reports that Israel and the Hamas could go for a ceasefire. Civilian casualties are rising and that is not making either sides comfortable. The truce hopes pulled down the price of crude oil from $83.55/bbl to $77.33/bbl. The other factor keeping crude oil prices under pressure was the US Fed policy statement which has decided to hold rates higher for longer. That means weak demand for oil could also last for longer as high rates are likely impact consumption.

    

6. The big story in the last week was about Reliance Industries. The stock not only gained 9% in the week, but even the oil & gas index gained 9.2% during the week. Reliance rally was triggered by sharply improved performance by its digital and retail businesses, even though the traditional O2C business was under pressure. However, the real kicker for Reliance came from the failure of the Sony Zee deal. This led to Zee walking out of the broadcast agreement with Disney, virtually reducing the valuation of Disney India by 50%. This is likely to be positive for Reliance media business.

    

7. In the previous week, the digital ecosystem faced some serious valuation questions. Unlisted Byju’s has been raising funds at 99% discount to its last valuations while Paytm saw 2 consecutive lower circuits after the RBI imposed a big ban on the payment bank unit of Paytm. Combined with the persistent selling by big PE funds in Indian listed start-ups; it looks like Indian capital markets and start-ups don’t appear to be seeing eye to eye. That is why, despite the pick-up in IPO issues, digital IPOs are still missing.

The coming week will be all about the RBI monetary policy announcement, where the language on liquidity and the monetary stance would be closely monitored.

STOCK MARKET TRIGGERS FOR COMING WEEK TO FEBRUARY 09, 2024

Here are some key factors that will have a bearing on stock markets for the coming trading week from February 05, 2024 to February 09, 2024.

1. For the latest week, the Nifty closed +2.35% higher, Sensex closed +1.96% higher while the Nifty Next-50 closed +3.04% higher. The bounce in the Nifty and Sensex was largely driven by Reliance Industries, and that will hold the key next week also. The FPI flows have also played a crucial role and that will remain the key. The action also spread to smaller stocks with the Mid-cap index gaining +2.69% for the week and the small cap index gaining a whopping +5.64%. It does look like alpha hunting is back and all set to continue in the coming week also.

    

2. Major large cap results to be announced for Q3 in the coming week include Bharti Airtel, Britannia, Nestle India, TCPL, Grasim, Divi’s Labs, ONGC, LIC, PowerGrid, Apollo. In addition, some key mid-cap results of companies like Lupin, Nykaa, Mamaearth, Varun, Godrej Properties, Zomato, Ashok Leyland, Alkem, Zydus, MCX are also expected in the coming week. Till now, the quarter has seen one of the slowest growth with IT being one of the better performers during the quarter.

    

3. The big story in the coming week will be the RBI monetary policy announcement. For now, the consensus is that the RBI will maintain status quo on repo rates at 6.5%. However, the real area of interest would be to check if the RBI modifies its monetary stance to be in tune with the current macro situation. Also, the markets will expend some guidance on the liquidity front, with the liquidity deficit already at Rs3.50 trillion. Of course, the bond yields fell sharply for the 10- year benchmark to 7.05% after the government announced FY25 fiscal deficit at just 5.1% in the interim budget. The lower fiscal deficit and the borrowing calendar for FY25 looks al set to push the bond yields below the psychological 7% mark.

    

4. FPIs flows to be under watch after turning positive in the latest week to the tune of $126 million in after 3 successive weeks of FPI selling. However, the real action will be on the debt and the IPO front. On the debt front, the debt inflows in 2024 have already surpassed the equity outflows, resulting in overall net inflows from FPIs. On the IPO front, there are 4 mainboard IPOs in the coming week and the FPI flows are likely to be robust. In the coming week, there are 4 IPOs viz. Capital SFB, Jana SFB, Rashi Peripherals and Apeejay Surrendra Hotels, which will be raising Rs2,600 crore between them.

    

5. The oil price focus will continue in the coming week after the sharp fall from $83.55/bbl to $77.33/bbl in the recent week. On the one hand, the Red Sea crisis looks all set to abate if Israel and Hamas agree to a ceasefire. Reports are that both are in advanced talks and there could be a ceasefire announcement any moment. That has pulled down oil prices and the pressure is likely to continue. However, the other story is on the US Fed decision to hold rates higher for longer. The concerns are that it could hit consumption and tame oil demand. Both the pressures are likely to combine to keep oil prices lower in the coming week.

    

6. The focus on digital stocks will continue. Paytm and Byju’s have seen their valuations crash sharply while more and more unlisted digital plays are being downgraded. Also, PE funds appear to be aggressively exiting the digital stocks. That is likely to remain an overhang for the digital stocks in the coming week.

    

7. Finally, let us turn to the global data points. Key US data points to be watched include PMI, Vehicle sales, API crude stocks, balance of trade, initial jobless claims, wholesale inventories. In ROW data points, the focus will be on PMI, HCOB, and retail sales in the EU. The focus in Japan will be on Household spending, PMI, and current account position, while the Chinese data focus will be on PMI, PPI, and the inflation rate.

NIFTY AND SENSEX TO TRADE WITH POSITIVE BIAS

Post the budget week rally, the new support for the Nifty has support at 21,700 and resistance at 22,100 levels. On the other hand, the Sensex has support around 71,400 and a resistance around 73,200 levels. On the upside for the Nifty, 22,125 will be the key resistance and any clear up move will only happen after that. However, the VIX at 14.7, will ensure a tight range for the Nifty and also a generally buy-on dips market. A lot will predicate on the RBI policy statement this week.