US Fed's interest rate cut has already given a boost to domestic benchmark indices. For D-Street, the big question now is: What comes next?
It's a new day, a new high for the Indian market. The recent 50 basis point rate cut decision by the Federal Reserve gave a sharp push to domestic benchmark indices on Thursday. Both Sensex and Nifty scaled fresh all-time highs as Dalal Street's uncertainty over global cues got a breather from Fed's decision.
While the in-line expectations of D-street analysts have fueled optimism, two factors could temper this euphoria. Firstly, the mixed US economic data which can pose challenges in the near term and second, high valuations present in the domestic market. According to analysts, this heightened valuation can limit short-term gains unless there's a massive rally in global stocks.
As for now, volatility continues to take the better of the investors. So, for the D-Street, the big question following the Fed’s rate cut decision is- What comes next?
Quite evidently, markets reacted with enthusiasm post-rate cut. While BSE Sensex crossed the 83,700 mark, the 50-company gauge, Nifty50, made a fresh high at 25,611 level mark.
But soon after these fresh highs were recorded, markets took a soft tone, erasing some gains. Analysts believe that while the interest rate decision was among the key factors impacting the market sentiment, a lot seems dependent on whether the Federal Reserve can make a soft landing.
"Sentiment for domestic equities in India, in the near-term, will depend on the prevailing global market sentiment (especially, expectations of soft/hard landing of the US economy)," said Unmesh Kulkarni, managing director senior advisor, Julius Baer India.
Kulkarni also highlighted that the Indian economy, in itself, is on a solid footing and compares favorably over other Emerging Markets, however, valuations might dampen the prevailing optimism.
"Valuations however are rich, and this may limit the near-term upside unless there is a runaway global rally. Moreover, if the probability of a global hard landing rises, Indian equities could witness higher volatility," he added.
Another key factor that is making analysts a bit jittery is the historical trend of big rate cuts. Every time the Fed started with a 50 basis point cut, the US economy ended up in a recession. But this time, the economy has stayed pretty resilient with inflation cooling down. Still, the jobs data could be a spoiler.
"While a slowdown in the US economy may dampen demand for Indian exports—especially in IT services—Fed Chair Jerome Powell's optimistic outlook on inflation and the labor market suggests a stabilizing economy," said Nikunj Saraf, VP, Choice Wealth.
Interestingly, if the US Fed makes a soft landing, it would be the first time in history when the apex bank avoided a recession after a 50 basis point cut.
As for the domestic market, the upward bias continues to sustain owing to the larger economic impact of the interest rate cuts.
"The big Fed rate cut by 50 bp has the potential to take equity markets into a consolidation phase with an upward bias. The Fed chief Powell’s remark that we have gained greater confidence that inflation is moving sustainably towards 2 per cent is a very optimistic commentary of the US economy," said Dr. V K Vijayakumar, chief investment strategist, Geojit Financial Services.
Usually, rate-sensitive sectors like financials, especially banking come under the spotlight after interest rate decisions. However, as a major part of the market outlook remains in the 'still watchful' phase, analysts remain confident in the style and sector rotation play.
According to analysts, during periods of volatility, investors typically favor a more defensive approach to asset allocation.
"We believe that with the recent run-up in the market, most of the narrative is already priced in. We see near-term consolidation in the market with style and sector rotation playing a meaningful role in alpha generation," Axis Securities stated in its recent report, also adding that the market might witness some time correction in certain pockets in the near term.
The brokerage firm also highlighted two key themes that appear attractive in the current market environment, ‘Growth at a Reasonable Price’ and ‘Quality.’
"We believe largecap private banks, telecom, consumption, IT, and pharma provide more margin of safety in the near term," the report further added.