Market outlook for the next week (15-Jul to 19-Jul)

13 Jul 2024 , 08:18 AM

STORY OF SECTORAL INDICES IN THE WEEK TO 12-JUL

The week to July 12, 2024 was positive but the undertone was relatively subdued. The bias of market gainers shifted from the mid-caps and small caps to the large caps with IT and FMCG stocks leading the market. That is a trend you don’t get to see too often these days. FPI flows into equities were robust at $885 Million in the week, resulting in an infusion of $6.80 Billion in the last 5 weeks into Indian equities. Among the heavyweights, the rally was driven by IT, FMCG and oil and gas stocks while rate sensitive sectors like automobiles, banks and realty came under pressure. The performance was a lot more mixed with gainers and losers almost equally distributed for the week. Here is a quick look at how the 20 key sectors performed in the week to July 12, 2024.

Sectoral Index	Weekly Returns	Index (12-Jul)	Index (05-Jul)
Nifty FMCG	3.56%	59,725.75	57,673.00
Nifty IT	3.45%	39,023.00	37,720.75
Nifty CPSE	3.09%	7,309.10	7,089.95
Nifty India Digital	2.67%	8,769.10	8,541.15
Nifty Oil & Gas	2.46%	12,855.50	12,547.00
Nifty Energy	0.76%	42,846.35	42,523.90
Nifty Non-Banks	0.57%	25,155.62	25,014.15
Nifty Healthcare	0.53%	13,044.10	12,975.30
Nifty Mobility	0.29%	21,506.69	21,444.60
Nifty Infrastructure	0.28%	9,276.30	9,250.60
Nifty Consumer Durables	0.24%	38,570.85	38,478.25
Nifty MNC	-0.23%	30,869.90	30,940.85
Nifty Logistics	-0.43%	24,133.16	24,238.04
Nifty Private Banks	-0.45%	26,146.80	26,266.20
Nifty Banks	-0.72%	52,278.90	52,660.35
Nifty Automobiles	-1.00%	25,145.45	25,398.30
Nifty India Defence	-1.14%	8,190.29	8,284.65
Nifty PSU Banks	-2.09%	7,203.00	7,356.75
Nifty Realty	-2.32%	1,093.20	1,119.15
Nifty Metals	-2.63%	9,708.20	9,970.50

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 12, 2024. Out of the 20 key sectors, 11 sectoral indices gave positive returns, with 9 sectors giving negative returns. In fact, most of the rate sensitive sectors came under pressure on higher inflation expectations.
• Let us start with the top gainers for the week. Surprisingly, FMCG and IT were the top gainers with weekly gains of 3.56% and 3.45% respectively. The other heavyweight sector that led the gains was Oil & Gas at 2.46% for the week. While IT gained from strong TCS results and weak rupee, FMCG gained from CRISIL projecting a sharp revival in rural demand. The oil story was largely led by Reliance on Jio valuation, but others like ONGC and Oil India also lent support. In the mid-cap space, it was again the same sectoral players from IT, FMCG and oil & gas that put up a good show.
• There were a total of 9 sectors giving negative returns in the week with metals the worst hit, contracting by -2.63% in the week on China demand concerns. Rate sensitive stocks like PSU banks, private banks, automobiles, and realty ended in the negative this week on account of higher inflation expectations. When the inflation was actually announced on Friday evening, it actually came in sharply higher at 5.08%. A standout loser in the week was defence, where stocks came under pressure due to elevated valuations.
• With only 11 out of 20 sectors giving positive returns in the week, the arithmetic average of returns of these 11 gaining sectors stood at 1.63%, while the arithmetic average of the 9 losing sectors stood at -1.22%. That is a lot of internal dichotomy. Out of the 20 sectors overall, 5 sector reported more than 2% returns, while 3 sectors reported more than 3% returns in the week. On the downside, 3 sectors fell more than 2% during the week, showing that it was a rather mixed week in terms of returns.

The big story in the week was that alpha hunting took a back seat as investors focused more on the macro attractiveness as well as the relative safety of large caps.

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

For the week, there were several key drivers with inflation and growth data being announced during the week. Here is the market story of the week ended July 12, 2024.

• The consumer inflation for the June 2024 came in sharply higher at 5.08%. The consensus estimate was 4.9%. In addition, the May inflation estimate was also upped by 5 bps to 4.80%. This takes the India consumer inflation more than 100 bps away from the RBI target of 4%. The pressure in the inflation basket came from the food inflation component, which spiked from 8.69% to 9.36% in June 2024. This may rule out rate cuts by the RBI, at least in the upcoming August 2024 MPC meeting.
• One of the direct outcomes of higher inflation was that the rate sensitive stocks took a hit in the previous week. To be fair, the inflation data was only announced on Friday evening, but the expectations of higher inflation were already there. For the week, private banks, PSU banks, realty and automobiles were among the losers. With actual inflation higher than expected, the spillover effect could continue in the coming week also. Considering the weightage of financials, it could put pressure on the Nifty.
• India industrial growth was robust in the month of May 2024 at 5.9%. It may be recollected that the IIP is reported with a lag of 1 month. The IIP was nearly 100 bps higher than the previous month of April 2024. The spike in the IIP was triggered by electricity IIP and manufacturing IIP. In fact, manufacturing IIP was 70 bps higher than the previous month; and the impact got magnified due to the weightage of 77.63% that manufacturing has on the IIP. Interestingly, the IIP is reporting a positive secular trend and positive momentum; as is evident from the IIP yoy growth and the MOM growth.
• FPI flows for the previous week were robust at $885 Million. The overall numbers may be lower in the last 4 successive weeks, but the truth is that FPIs have infused $6.80 Billion into Indian equities since the Modi 3.0 govern too oath of office. That is a big show of confidence in the current government and in the economy. FPI flows are likely to pick up momentum once the colour of the Union Budget is known and after the Fed actually cuts rates in September. CME Fedwatch is assigning a very high probability of 96% to a rate cut in September, but there is nothing like the real thing happening.
• The big story in the global markets was the US consumer inflation for June 2024 tapering by 30 bps to 3.0% as compared to 3.3% in the previous month. In a sense, the US inflation number has gotten out of its comfort zone. But that is not the only good news. The real positive takeaway is that energy inflation has fallen sharply in the month, something that has been the real challenge for the US economy. If PCE inflation falls in tandem, there is a strong base case for the Fed to cut rates in the September meeting.
• Mutual fund flows into equities in June 2024 were robust, despite the quarterly selling in debt funds. Equity funds saw record inflows of ₹40,608 Crore in June 2024, which was largely driven by sectoral and thematic funds. June 2024 also saw record inflows into systematic investment plans (SIPs) at ₹21,262 Crore. SIPs have been setting new records for 12 months in a row now. Even flows from new fund offerings (NFOs) were robust at over ₹15,600 Crore, although sectoral and thematic funds continue to dominate the story of NFOs. Markets will take solace from the fact that even if FPI flows falter, the mutual funds have enough ammunition to keep the markets chugging along.
• Jefferies upgraded the price target of Reliance Industries by 15%, based on the embedded valuation of Reliance Jio at nearly $112 Billion. This could be much higher if there are more tariff hikes and if these tariff hikes sustain in a competitive market. However, the only concerns is that the holding company discount could slightly depress the valuations. Considering its size, any such value discovering moves by Reliance will have a profound impact on the markets overall.

Most of the data flows were positive for the Indian markets. Let us now turn to the key triggers for the coming week, which could influence the direction of the markets.

STOCK MARKET TRIGGERS FOR COMING WEEK TO JULY 19, 2024

Here are some of the key stock markets triggers that can influence the direction of the stock markets in the coming week to July 19, 2024.

• Nifty closed the week +0.73% up, Sensex +1.65% higher and Nifty Next-50 +0.42% higher for the week. For the coming week, the focus will again be on the frontline generic indices, which offer attractive valuations and relative safety and stability. Among smaller indices; Nifty mid-cap index was up +0.15% while small cap index closes almost flat with +0.04% gains. A lot will depend on the action in defence stocks as it has a profound impact on the small and mid-sized stocks.
• Q1 results season has started with the positive numbers from TCS. For the coming week, key large cap results for Q1FY25 include Reliance Industries, Infosys, HDFC Bank, HDFC Life Insurance, Bajaj Auto, Asian Paints, Ultratech Cements, Kotak Bank, LTI Mindtree, JSW Steel etc. The key mid-cap results for Q1FY25 are Jio Financial, HDFC AMC, Angel One, Havells India, LTTS, Persistent, Polycab, ICICI Lombard, Paytm, PVR Inox etc.
• In major data flows for the week, the WPI (wholesale) inflation will be announced on Monday, July 15, 2024. The WPI inflation has been on a rising trend and for June 2024, the wholesale inflation is expected to be higher than previous month figure of 2.61%. That is likely to put some pressure on the input costs. The other big domestic data for the coming week will be the trade data which will be announced on Monday. The markets will be closely tracking the merchandise trade deficit and the services trade surplus for June to decipher indications for the likely level of Q1 current account deficit.
• Fed chair Jerome Powell speech in the coming week will be a major area of focus. After being neutral in the Congress testimony, Powell is expected to offer the first hints of rate cut timetable. In addition, others like Barr, Bowman and Bostic are also expected to speak in the coming week. The markets will be watching the impact of these speeches on the probabilities in the CME Fedwatch.
• Oil and USDINR will also be in focus in the coming week on rising risk factors globally. The price of Brent Crude is already above $85/bbl and the strong US demand is adding to pressure on oil. That also means that the Indian rupee could also be under pressure during the week. Markest will also be tracking US bond yields and dollar index next week for cues on the financial markets.
• In the mainboard, there is just one IPO of Sanstar Ltd that will open for subscription in the coming week. The others would be SME IPOs. The other data point to watch out for this week will be the volatility index (VIX). Last week, the VIX bounced 8%, so some pressure is likely amidst rising global volatility.
• Key data points from US markets next week include Fed speak, retail sales, business inventories, API stocks, IIP, capacity utilization, housing starts, jobless claims. Key ROW triggers are Trade, Inflation (Japan); GDP, IIP, jobs (China); IIP, Trade Balance, Inflation, ECB Rates (EU); Inflation, PPI (UK).

What do all these triggers mean for the direction of the markets next week? Here is a quick dekko at our market outlook.

PARTING THOUGHTS ON NIFTY AND SENSEX NEXT WEEK

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

• Last week, VIX spiked by 8.5% to above the 14.5 levels. That is still tolerable, but global markets are in a state of flux, so traders have to be cautious. Markets will be comfortable if the VIX stays in the range of 12 to 13.
• For the Nifty, 24,500 will be the support and the next big target will be 25,000. Most of the shorts are covered and so there is the need for genuine buying now. It will depend on momentum, and for now the momentum is with IT, oil and FMCG.
• For the Sensex, 80,000 has just been taken out and the 81,000 mark remains the next big target to watch out for. Union budget hints, oil prices, and FPI flows will hold the key to the coming week.

For now, the next big trigger will be the full budget, hoping that it maintains the reformist undertone of previous governments.