Budget done, markets at new high; here’s what will drive equities now

"With two major events (Fed Meet and Budget) now behind, we expect markets to take support from the ongoing Q3 earnings season, and remain in positive territory," said Siddhartha Khemka, Head - Retail Research, Motilal Oswal Financial Services Ltd.

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Beyond domestic factors, the market will be influenced by the global landscape, including geopolitical developments, interest rate moves, movement in US bond yields, the dollar index, and crude oil prices. Bank of England’s monetary policy, coupled with a few key economic data releases, will likely keep investors on their toes.

Central bank meetings

Policy rate decisions of major countries will affect the markets, analysts said. The US Fed held interest rates steady on January 31 and even quashed the possibility of a rate cut in March.

While there was no major impact of the policy decision on financial markets with 10-year yields closing lower on the day, a further delay in rate cuts can sour sentiment.

Red Sea turmoil

The threat to ships in the Red Sea region isn't at the same scale as the disruption caused by the Russian invasion of Ukraine and is likely the market will once again be able to adjust fairly rapidly. However, if tankers avoid the Red Sea for an extended period, refined fuels in Asia and Europe are likely to see a price spike.

According to CRISIL, the Red Sea turmoil is posing challenges for many sectors and any aggravation of the crisis is a potential threat for the equity markets, as it can stoke inflation.

Elections

Not just India, but over 40 nations will go to the polls this year.

According to a Goldman Sachs analysis of more than 1,000 elections across 152 economies, polls tend to impact monetary policy and raise economic uncertainty and sometimes financial markets can swing as a result.

Analysts at Morgan Stanley believe that any surprise outcome in India's Lok Sabha elections may lead to about a 30 percent fall in the market.

Inflation

CPI inflation numbers will be key going forward as they will dictate the Reserve Bank of India's interest rate decision. High crude prices and strained global supply chains can cause a delay in reduction in rates. They can also pull economic and corporate earnings growth down, analysts said.

Q3 earnings

The December quarter earnings will be the main driver of market, said analysts as some major companies are still to announce their numbers. Kotak Securities believes that one will get a better sense of the sustainability of the investment cycle in the next few days as companies in the capital goods sector report their earnings and give guidance on near-term order inflows.

Also Read | 7 large-cap stocks to beat the market post-Budget

Valuations

According to BNP Paribas, India looks solid on most parameters including strong domestic and FPI flows, earnings growth and macro-outlook. In terms of underlying fundamentals, the country has seen double-digit earnings growth with minimal consensus downgrades. However, valuations are elevated.

While most factors remain favourable for Indian equities in 2024, valuation comfort has reduced which may play a spoilsport, the brokerage said.

Stock-specific news: In the coming months, stock-specific news developments may also act as key triggers for markets. How HDFC Bank stock tanked over 12 percent in 2 days after disappointing Q3 results, dragging benchmarks or Paytm stock falling 40 percent 2 days after RBI's crackdown on Paytm Payments Bank, large movements are likely in specific stocks depending on the news cycle.

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