Volatility to Continue as Market Disconnect with Economy Widens

The disconnect between the economic reality and the market movement was once again evident last week as, despite having largest number of active Covid cases in the world in its second wave of pandemic, the Indian markets outperformed most global markets. Almost all global markets displayed flattish movement last week. Nifty-50 and Sensex both ended in the black on a weekly basis despite profit-booking in the last session on Friday and were up 2.02 per cent during the week. The Nifty and Sensex closed on Friday at 14,631 and 48,782 respectively.

The firm trend is expected to continue in the Indian markets even as the cases may be on the rise and derailed vaccination may take some more time to come on track. The markets are firm mainly on the back of Corporate India posting fourth quarter earning numbers in line with market expectations. Analysts believe that although valuations have factored in the good corporate performance, the markets may consolidate at the current levels.

The fall in market on Friday was also on account of cautious nervousness prevailing ahead of Assembly poll results on Sunday. The commodities sector was in limelight during the week as well as across April. The metals sector in particular was under focus in April and it is expected to continue to perform better in the days to come, analysts said.

Metal stocks continued their dream run with the BSE Metals Index gaining 10 per cent last week, 24 per cent in April and 53 per cent on the calendar year-to-date (CYTD) basis.

“Metal stocks are continuously outperforming the index and the show may go on for the coming week also,” says Vishal Wagh, Research Head at Bonanza Portfolio.

Persistent rise in commodity prices could be another threat that could hit margins of manufacturing companies. LME Copper prices touched $10,000 per tonne for the second time in the last 10 years. Copper price has gone up 92 per cent in the last one year and 28 per cent in this CYTD. China’s withdrawal from the steel export market should keep former China steel prices or margins elevated for longer. Domestic flat prices are currently around 15 per cent discount to import parity and dealers expect a price hike of Rs 2,000-3,000 per tonne for May 2021. Domestic HRC prices have increased by 15 per cent month-on-month in April.

Indian equities gave its best performance in the last three weeks and ended losing streak of previous two weeks although foreign portfolio investors (FPIs) remained net sellers during the period. In fact, they remained net sellers throughout the month of April and sold equities worth Rs 8,500 crore. This is for the first time in the last six months that foreign players have pulled out of the Indian equity markets. Surprisingly, domestic institutional investors (DIIs) turned net buyers in the equity segment in April and they bought shares worth Rs 9,900 crore.  

“Indian markets could face headwinds on every rise because of the looming negatives and threat to earnings. Going ahead more states may extend curbs to control the virus. The staggered state-level restriction and mini lockdowns this time are having a bigger impact on the services sector and lesser impact on the manufacturing sector,” says Rusmik Oza, Executive VP and Head of Fundamental Research at Kotak Securities.

During past week’s FOMC meeting, the US Fed continued to maintain interest rates at previous levels and exhibited confidence in recovery, even though it is far from complete. They are clear with their intention to continue purchasing bonds which will further add liquidity into the system, indirectly cushioning the equity markets.

The eurozone economy contracted at a slower rate than analysts had expected in the first three months of the year, shrinking 1.8 per cent year on year. Economists surveyed by Reuters had forecast a 2 per cent decline. France’s economy grew 0.4 per cent in the first quarter of the year, despite the tightening of restrictions to limit the spread of the Covid-19 pandemic. But Germany’s economy declined 1.7 per cent, while the Spanish and Italian economies contracted 0.5 per cent and 0.4 per cent.

“Mirroring global indices, the Indian markets too showed some optimism. They are expected to remain buoyant and investors are advised to continue with their stock specific investments for the long haul,” Nirali Shah, Head of Equity Research at Samco Securities, says.

“We will certainly see GDP growth estimates and earnings estimates getting cut over the next 2-3 months in the wake of second wave of covid causing severe damages. One can stay cautious and look to have a buy on dips strategy for future investments,” Oza says.

Shrikant Chouhan, Executive VP, Equity Technical Research, Kotak Securities, says: “We feel the hammer formation of last week should act as a bullish continuation formation. Supports would be 14,600, 14,500 and 14,300. On the higher side, again 14,850 and 15,000 would be major obstacles.  On the dismissal of 15,050, Nifty would rally to 15,500 levels. In the coming week, we would see further bullishness in pharmaceuticals, commodities and PSU stocks. The value buying should emerge in private banks.”

The market may react on Monday to the election results in the five Assemblies. Participants will also react to the Reliance Industries Ltd (RIL) results which came in after market hours on Friday. Besides, monthly auto sales numbers will also start pouring in from May 1.

On the economy front, Markit Manufacturing PMI and Markit Services PMI data are scheduled on May 3 and May 5 respectively.

“In the week ahead, along with Q4 earnings results and updates on Covid restrictions, state election results are also expected to influence the momentum. The market also awaits manufacturing and service PMI data for April which is expected to be lower than the previous level,” says Vinod Nair, Head of Research at Geojit Financial Services.

Earnings season will also gain pace and some big names like Kotak Mahindra Bank, Hero MotoCorp, Tata Steel, Dabur, HDFC ltd will announce their results along with several others.