Moneycontrol
Last Updated : Aug 21, 2018 08:41 AM IST | Source: Moneycontrol.com

Monsoon, macro developments to dictate near-term market trends

Steady crude price (post 7% fall in July from the peak), reiteration of strong economic outlook by the IMF and convincing June quarterly earnings were the key factors in bolstering investor confidence this month

Moneycontrol Contributor @moneycontrolcom

Rajeev Srivastava

Reliance Securities

Indian bourses broadly remained in the grip of the bulls as they hit fresh highs on most trading days in August 2018 barring last few sessions on account of Turkish lira contagion effect. Reversal in FII flows were underpinned by the RBI retaining its “neutral” stance in its monetary policy meet, and mixed-yet-convincing first quarter June-ended corporate earnings helped the Nifty and Sensex to mark marginal gains of 0.3% and 0.2%, respectively. FII inflows in August 2018 till date stood at Rs 8,025 crore (debt + equity) compared to Rs 2,270 crore in July 2018.

While the current month so far has been full of events in the form of policy meet outcome of the US Fed, the RBI and the BoE, it was the stellar listing of HDFC AMC that grabbed attention of all categories of investors before markets fell prey to concerns over weakening Indian rupee led by contagion impact of fall in Turkish lira. HDFC AMC IPO proved to be a hot cake, with oversubscription of 83 times and listing gains of over 58%.

Further, steady crude price (post 7% fall in July from the peak), reiteration of strong economic outlook by the IMF and convincing June-ended quarterly corporate earnings were the key factors in bolstering investor confidence, which made India a safer destination for global investors amid prevailing tariff war between two major global economies — US and China.

However, with the earnings season being over, markets will take cues from the final outcome of monsoon and any major global developments. We continue to maintain our positive stance on markets till 11,300-levels is not broken.

Below which the monthly candle turns negative putting pressure on index pivotal, while on the higher side, the monthly pivot resistance is placed at 11,650-levels, from where in we could expect some profit booking.

Q1FY19 Corporate Earnings – Mixed-yet-Convincing

On analysis of quarterly performance of 446 companies from BSE-500, we have observed that aggregate earnings growth stands at 7%, which adjusted for PSU banks comes in at 19%.

Among sectors, FMCG, refineries, chemicals and pharmaceuticals posted strong performers with average earnings growth of 25-35%, while technology (software), energy and consumer durables witnessed an average growth of 15-20%. However, automobiles, banks, infrastructure, cement and capital goods sectors were laggards.

Further, management commentaries of the companies of several industries have been encouraging with expectation of sustainable growth in ensuing quarters. Contraction in fresh slippages of banks signifies that worsening asset quality of banks is approaching its last leg, which was applauded by the investors.

Market to tread between earnings growth trajectory & micro outlook for long term.

Indian indices have been one of the best performers over the last one-and-a half months underpinned by likely scenario of easing of micro concerns with the advent of decline in crude prices and satisfying progress on monsoon so far, albeit with moderate shortfall.

Notably, Sensex is trading at 18 times one-year forward earnings, which is 8 -10% premium compared to historical average. We believe the sustainability of premium valuations largely depends on sustainable earnings growth momentum in subsequent quarters, final outcome of monsoon season, inflation trend and political scenario. Any adverse outcome on any of these fronts may have potentially negative impact on the markets. Hence, we believe that at these premium valuations, one needs to be stock-specific and should invest in quality stocks with healthy earnings visibility and sound corporate governance.

Disclaimer: The author is Head – Retail Broking at Reliance Securities. The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Aug 21, 2018 08:41 am
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