Hope rally on in market, pain will show post Budget, say analysts
Investors are ignoring near-term disturbances to focus on the long-term growth story.
Indian investors are ignoring near-term disturbances to focus on the long-term growth story, which remains robust.
“A lot of hope trade is happening. However, it is time to be cautious. I believe post-budget, the next five-six months might become tough,” said Ambareesh Baliga, an independent analyst.
“Once we have a pre-budget rally, that would be the peak for the market for now, Looking at the situation, it cannot be a market-friendly Budget,” Baliga said.
The market is still gaining traction largely on the back of a stable political mandate at the general elections, but that is already in the price.
“The market is still upbeat on election results, but the ground realities in terms of economic data do not make a good case. Concrete earnings recovery is also not in sight,” he said.
BSE’s 30-share Sensex has risen around 2 per cent since the start of May, and scaled a record high of 40,308 on June 3. It traded around 39,900 on Tuesday.
Post-election verdict, while market sentiment improved, underlying macros weakened with GDP growth coming in at a 20-quarter low.
India lost its spot as the fastest growing major economy to China, logging a disappointing 5.8 per cent expansion in the January-March period as a chill in domestic and global consumer demand hit manufacturers and service providers.
The sub-6 per cent growth of Q4 for Asia’s third largest economy was the slowest in five years. The economy had grown at 6.6 per cent in third quarter, 7.1 per cent in second and 8.2 per cent in the first.
“Deceleration in core sector growth, weakness in high-frequency indicators (IIP, auto sales) and slowdown in consumption, as highlighted by consumer companies in their quarterly commentaries, point towards near-term earnings headwinds,” Motilal Oswal Securities said in a June 3 note.
The brokerage said Nifty valuations remain rich at 20 times financial year 2020 earnings per share (EPS).
High frequency data too, has been disappointing. After posting eight-year low sales in April 2019, India's passenger vehicle manufacturers recorded a 22 per cent decline in sales in May owing to high financing cost, lack of purchasing power and economic uncertainty.
Industrial production data for April is due on Wednesday. The country's industrial output declined by 0.1 per cent in March, hitting a 21-month low, due to a contraction in manufacturing, capital goods and consumer durables. Manufacturing, which constitutes 77.63 per cent of the Index of Industrial Production (IIP), shrank 0.4 per cent during the month. The market will take a close look at this significant indicator of the country's economic health.
On the global front, trade war and indicators of a global economic slowdown are increasing worries of an approaching recession.
US job growth slowed remarkably in May and wages rose less than expected, triggering worries that a loss of momentum in economic activity could be spreading to the labour market, which could in turn prompt the Fed to cut interest rates later this year.
Also, looming fear that the liquidity crisis in the NBFC (non-banking finance companies) space may have turned into a solvency crisis remains a key concern.
“For a sizable correction to come in the market, you will have to see a big correction in global markets. As far as domestic factors go, yes, there are issues and concerns, but for the next few months, there will be a hope trade and this is what you are really seeing in the market right now,” Atul Suri, CEO, Marathon Trends-PMS, told ETNOW last week.
“For three months, you have this honeymoon phase and there will be a hope trade domestically,” he said.
“At the moment, in my world view, the challenge is unless and until global markets do not correct big time, India will outperform and it has been outperforming for last three months even on a global scale. That got a further boost post-election results and it will continue through the honeymoon phase of the government in the first three months,” Suri said.