Editorial

Sector And Stock-Specific Events May Present Buying Opportunities

Asequence of lower tops and lower bottoms from the record high levels continue to develop in the Indian stock markets. Markets witnessed profit-booking amidst a rash of shattering events that forced the bulls to beat a provisional retreat. The trade war between the two largest economies continues and this time China is likely to capitulate rather than retaliate after Trump played his biggest move ever by announcing 10% tariff on Chinese goods worth USD 200 billion annually. China is done imposing tariffs on almost all goods from the US and, for now, it has nothing left to target the US or defend itself in the trade war. China has devalued its currency, which will make its goods cheaper in the US and help offset the tariff concerns to some extent. However, increasing the import expenses simultaneously may raise the risk of inflation and lead to more capital outflow. China’s levy on the US goods has resulted in diversion to India. Otherwise, India and the US have relaxed or delayed slapping tariffs on each other, for now. 

On the domestic front, the data which was much looked out for was released last week. The retail inflation eased to 11-month low level of 3.69% in August as against 4.17% in July, but it is above 3.28% in the corresponding month of the previous year. The WPI too cooled down to 4.53% in August as against 5.09% in July. Despite easing food prices, the weakening of rupee, which is currently trailing near its historic low levels, has increased import costs of fuel which is already at an escalated level. Even the below normal monsoon in the most fertile regions has raised concerns over the likelihood of rising food prices in future. Hence, though inflation is below RBI’s target level of 4%, RBI would continue with gradual tightening amid fear of higher inflation in the near term, as the IMF has forecasted inflation to rise to 5.2%. As it is, GDP growth of 8.2% favours every RBI move towards tightening. Even the IIP, which grew at 6.6% in July amid bounce-back in manufacturing activity and higher purchases of capital goods and consumer durables, is portraying better economy going ahead. 

Apart from these derived negative conditions, a direct blow to the Indian markets was from the international rating agency Goldman Sachs. It downgraded the Indian equities from “market-weight” to “overweight” for the first time since 2014, indicating an end to the energetic phase. The stretched valuations, reversing macro numbers, continued global pressure resulting in dollar appreciation, the Union budget and the election concerns have resulted in investors turning a cold shoulder towards India equities. 

Nevertheless, some domestic sector-specific events have kept select sectoral indices and the sectors going. This will not help the major indices to go back towards the record highs, but it will definitely help the stocks to bounce back or continue growing. For now, apart from pharma, IT and other export-oriented businesses which still look promising, the metal and commodities sectors are witnessing a silver lining and could be good bets. Banking consolidation is likely to continue with the government’s decision on merger, which may keep the benchmark indices on their toes. The greed of buying on dips as well as the fear of exiting all positions in a falling market would prove harmful under the given market conditions.