Market outlook for the week (15 January to 19 January)

15 Jan 2024 , 09:00 AM

MARKETS AMBIVALENT WITH POSITIVE BIAS

It was a week of mixed data. The US inflation was higher than expected, but the India inflation was lower than expected. However, both the data points were higher than the previous month. The index of industrial production (IIP) for the Indian economy grew by just 2.40% in November (reported with a lag of 1 month), which is sharply lower than the 11.6% growth in the previous month. Markets may not take this fall too seriously as it is more on account of the shift in base due to the Diwali boost. The joker in the pack was the results of IT companies. While sales growth was lower than expected, the operating margins turned in better than expected. Above all, the markets gave a thumbs up to the results.

There are several reasons why the market remains ambivalent with a positive bias. Much of the positives in the Indian market already appears to be priced in, so further upsides look to be slow and measured. However, the VIX continues to be low at around 13, indicating that it still remains a buy on dips market. The US may not be in a hurry to cut rates after the sharp spike in the consumer inflation, but that also means good tidings for the Indian IT industry. The FPI allocations have been looking at other Asian markets for allocations due to cheaper valuations. But, with 7% growth and GDP moving from $3.5 trillion to $5.1 trillion, India is hardly a market that too many FPIs can afford to ignore. The result has been a market that remains ambivalent with a positive bias.

MIXED PERFORMANCE BY AN ARRAY OF SECTORS

During the recently concluded week, the markets ended higher despite the less than encouraging data flows on inflation, IIP growth and Q3 results. However, the overall Nifty and Sensex were still higher by around 85 bps due to contrasting performance by various sectors. On the positive side this week were sectors like IT, oil & gas, and automobiles. Let us look at the reasons for the positive bias in select sectors. For IT sector, it was a case of better than expected operating margins and the gains of delayed rate cuts. The rally this week was all about Reliance Industries while the story of auto sector was about the two wheeler sector, which is playing catch-up, even as tractors are under pressure.

What about the sectors on the downside? Banking remains under pressure with higher inflation reading and IIP coming in lower than expected. Also, banks are likely to see the cumulative impact of higher NII (net interest margin) and wider NIMs (net interest margins) gradually diminishing in this quarter. The other sector to lose out was the FMCG sector, which surprisingly fell by over 2%. There are genuine concerns over the quality of revival in rural demand and the ability to pass on higher costs. It was this contrasting picture that had a net effect of holding the Nifty and Sensex in positive zone for the week.

WHAT TRIGGERED THE MARKET MOVES IN THE PREVIOUS WEEK? 

Broadly, there were 7 factor that influenced the Indian equity markets, in the first week of the New Year.

1. The big data point for the week started with the US inflation in the middle of the week. The US consumer inflation reading at 3.4% was 30 bps higher than the previous month. The pressure came largely from energy inflation, clearly an outcome of the ongoing Red Sea crisis. But, this has other implications too for the Indian market. It indicates that the US Fed may now be reluctant to stick to its aggressive rate cut plans of 3 cuts in 2024 and 4 cuts in 2025. While the Fed may not hike rates for now, it may prefer to hold the rates at higher levels for longer time frame, before embarking on rate cuts.

    

2. Even the India CPI inflation was announced on the last day of the week. CPI inflation for December 2023 came in 14 bps higher at 5.69% and the culprit was once again food inflation. In fact, food inflation spiked from 8.70% to 9.53% and has been a key driver of higher inflation in recent months. Within the food basket, most of the pressure on inflation is coming from cereals, pulses, vegetables, and fruits. Clearly, the lower than expected Kharif output and delayed Rabi output is taking its toll.

    

3. Apart from the inflation data, India also announced the index of industrial production (IIP) data for November 2023. The IIP was sharply lower at 2.40% compared to 11.60% in the previous month. However, this can be entirely attributed to the base effect shift and if that is adjusted then the sustainable IIP growth should be closer to 7%, which is a lot more comfortable. Despite the sharp fall in IIP, the markets are not too perturbed, as it is more of an accounting adjustment.

    

4. It was a week of weak frontline IT sector results for Q3-FY24. TCS and Infosys saw pressure on sales growth, Infosys even reporting lower profits on yoy basis. However, both the companies improved operating margins on the back of sharply lower employee costs amidst a sharp reduction in manpower count at both the companies. Markets ended up giving a thumbs-up to the IT stocks for better margins and also celebrated the fact that higher US inflation would delay rate cuts and make the dollar stronger.

    

5. The Red Sea crisis continued to be the biggest threat to world trade. Houthi rebels in Yemen, with the support of Iran, have been firing missiles on ships passing through the Red Sea. This is a key trade route for Asia with the West and now the Suez Canal is almost blocked for use. The spike in freight rates and insurance costs and the delayed deliveries is expected to hit Indian exports by $30 billion. In addition, imports are also likely to trigger imported inflation. Higher oil prices could be the immediate outcome.

    

6. The twin global macro variables US bond yields and dollar index were relatively quiet in the week, despite the sharply higher inflation announced by the US Bureau of Labour Statistics (BLS). The sharp spike in inflation was largely an outcome of high energy inflation even as food inflation and core inflation actually trended lower. However, the Red Sea crisis shows no signs of relenting and that means inflation may continue to remain elevated, something even the recent Fed minutes had mentioned. However, despite the tumult in the market, the US bond yields actually tapered back below the 4% mark while the US dollar index (DXY) closed absolutely flat for the week. Clearly, both are absorbing multiple data points for now.

    

7. Finally, the week saw FPI outflows from Indian equities after a gap of over 8 weeks. FPI outflows were rather limited at just $110 million. However, this comes in the backdrop of nearly $9.55 billion infused in the previous 6 weeks, so there is really not much to be concerned about. Even in the month of January, debt has dominated, accounting for 60% of the FPI net inflows compared to just 40% for equities. Overall, the traction of FPI flows has stayed firm. Normally, the first few weeks of the calendar year represent a quiet period and the real trend may become apparent after the Union Budget 2024-25.

Going ahead, the market sentiments will be broadly driven by the FPI flows and the shift to large caps. The large caps are still around their 10-year average valuations, so there is still room on the upside. However, the small caps and mid-caps are at substantial premiums to their 10-year average. That could be an overhang for their up-move in coming weeks.

STOCK MARKET TRIGGERS FOR COMING WEEK TO JANUARY 19, 2024

Here are some of the major stock triggers to watch out for in the coming week to January 19, 2024. With limited data flows, results are likely to have a huge influence in the coming week, as far as the direction of the market is concerned. Here are some key triggers.

1. Nifty and Sensex closed 85 bps higher for the week. The rally in the frontline indices was led by IT and oil & gas stocks, but banking is likely to stay under pressure. FMCG direction in the coming week will depend on the signals from Q3 results.

    

2. The smaller stocks were relatively tepid in the week with Mid-cap index up +0.25% and small cap index up +0.69% in the week. The returns on smaller stocks were subdued and valuation premium concerns are likely to slow demand for these smaller stocks.

    

3. It is a week of important results announcement. The coming will see large cap results of HDFC Bank, ICICI Bank, Kotak Bank, Asian Paints, Hindustan Unilever, LTI, Ultratech and Jio Finance. Among mid-caps the key results include Federal Bank, ICICI Lombard, Angel, LTTS, Mufti, Polycab, Jindal Stainless, HZL, Poonawala, and Paytm. There are also key corporate action record dates in the coming week for dividends by TCS, merger record date for Tinplate and Tata Coffee; and buyback RD for Dhampur Sugar and Chambal.

    

4. In major domestic macro data flows this week, the WPI inflation for December 2023 will be announced on Monday 15th January. Last month, the WPI inflation had turned positive at 0.2% after 7 months of negative WPI inflation. December WPI inflation is expected to surge further to 0.8%. In addition, the Trade data for December 2023 will also be announced on Monday. The markets will focus on the trend of merchandise trade deficit and the services surplus. The markets will assess the impact of the Red Sea crisis on export demand as well as on imported inflation risks.

    

5. China GDP numbers for Q3 and industrial capacity utilization data will be announced this week. China has been the slowing factor in a global recovery and the markets will look for positive news from China. After all, scores of nations, still depend on China to effectively run their export engines and drive growth. China still holds central place.

    

6. Two swing factors this week will be the price of Brent crude and FPI flows. Brent Crude at $78/bbl brings the focus back to the Red Sea crisis. However, with shipping lines boycotting the Red Sea route, crude is likely to stay elevated. Also, with macros ambivalent, the FPI flows may remain slow. After infusing $9.55 billion in 6 weeks, the last week saw FPIs taking out $100 million. That is small, but may set the trend.

    

7. IPO markets are still to see big action in January. The coming week will see just one mainboard IPO of Medi Assist Healthcare to the tune of Rs1,071 crore. The rest of the IPO openings and the IPO listings pertain to the SME IPO sector. 

    

8. Finally, a look at key global data points. For the US, the focus will be on Retail sales, IIP, business inventories, API stocks, initial jobless claims, housing starts and existing home sales. For the EU, focus will be on Trade, IIP, Inflation, and Current Account; while UK will focus on inflation, unemployment, and PPI data. In Asia, Japan focus will be on inflation, PPI, machine tools orders; while China focus is on GDP, IIP; UK inflation, PPI, and jobs.

With limited data points, the markets in the coming week are likely to be influenced by the China GDP data, and the quarterly results progress. The US Fed Speak will also be tracked.

NIFTY NEXT RESISTANCE AT 22,100 AND SENSEX RESISTANCE AT 73,500

The Nifty and Sensex closed with gains this week, but it was largely on account of the late rally in IT stocks and Reliance Industries. For the Nifty, having breached 21,750, the next major resistance would only be at 22,100, while 21,750 will now be the higher support level for the Nifty. With VIX still subdued at 13.1 levels, the Nifty should once again become a buy on dips story. That should help the story sustain for the time being. Also, the other trend this week will be the bigger focus on large caps. That was visible last week, but could get accentuated this week.