Editorial

Markets May Witness Near-Term Correction, But Only To Move Up Strongly

When things appeared to be going well for the markets, the RBI threw the spanner in the wheel by announcing a repo and reverse repo rate hikes of 25 bps each, registering its first back-to-back rate hike in nearly last five years, causing Indian stock markets to pause their record closing spree. The key benchmark indices took a U-turn from their peaks, while the broader market indices kept going. The RBI stance was in the wake of costlier fuel prices that brought a spike in retail inflation to a 5-month high of 5% in June, against its set target of 4% (+/- 2%). The commercial banks are yet to react on the same till now, but it may be recalled that the banks had avoided passing on the burden to the customers during the last rate hike, but few banks had hiked the MCLR by up to 0.1% ahead of the policy review. However, the second consecutive hike by RBI may provoke banks to hike the lending rates and also take into account the cost of funds. What is important from the investors' point of view is that the EMIs on loans may go up, be it home, auto, personal, etc. Talking global, the US Fed on the other hand kept the rates unchanged, but signalled the possibility of two straight rate hikes by December 2018 amid strong economic growth and inflation hovering slightly above 2%. Earlier, the ECB too had held the rates stable.

Now, a year has passed since the country rolled out the GST in June. The country is at the threshold of fresh macroeconomic numbers, which kicked off with the announcement of auto sales. Car sales, along with passenger vehicle sales, have dropped marginally as compared to the sales July last year, where the auto makers had started fresh supplies post-GST, which had led to an increase in sales. Next came the PMI numbers, where the manufacturing sector had slowed down marginally to 52.3 from 53.1 in June amid softening of output, new orders and jobs. Meanwhile came the infra output data, which increased by 6.7% in June, its fastest speed in the last 7 months. The GST collection too has surged to a 3-month high, but it has missed its monthly target of Rs 1 lakh crore. We are already in the midst of corporate earnings, which are going good for now, with a bounce-back in banks, cement, IT and FMCG.

Markets have digested weakness in the rupee amid higher crude prices, the latter having provisionally softened though. This has been possible due to the strong macros, which are depicted in the Q1 earnings and also by the passage of a year of the GST roll-out. Even the FIIs have turned net buyers in July, first time after March 2018, keeping the DII investments at a slower pace. However, rupee's stability and speedy earnings growth will trigger further investments, which will majorly depend on Fed's decisions and crude price movement. Indian indices have entered the overbought zone with P/E hitting the 28x mark. Hence, a trend reversal in most of the bottomed-out stocks is yet to be confirmed. In fact, the markets may see a near-term correction, but majorly for a better move upside. But investment is just not about Nifty/ Sensex or broader indices. Hence, stay invested in the fundamentally strong stocks posting positive Q1FY19 numbers and indicating bullish continuation or reversal. Follow the bottom-up approach and go for stocks with strong upside momentum.



(Subscribers can send their feedback and queries on technicals portfolio guide to fnieditor@dsij.in).