Indian Markets Enter ‘Wait & Watch' Zone

The volatile market movements in the past truncated trading week and muted listings of new initial public offerings (IPOs) on the debut day is an indication of Indian markets entering into ‘Wait and Watch’ zone. A warning issued by one of the leading foreign Brokerage, of Nifty to correct by 9 per cent by end of the calendar 2021 is also likely to weigh on the market next week. 

After scaling consecutive new peaks in shorter spans, the benchmark indices closed marginally lower on a weekly basis on Friday. Nifty closed the week at 16,450.50, down by 0.48 per cent. The broader markets too saw weakness in the volatile week, with BSE Midcap and BSE Small-cap falling by ~0.5 per cent and 1.6 per cent respectively. The volatility index, India VIX, spiked 8.6 per cent higher at 14.02 levels.

The stock market recently saw huge exuberance in the listing day trading segment of the market as many IPOs gave its IPO market investors a return in excess of over 100 per cent. However, last week, out of the five IPOs, only two of them got listed with marginal gains, and the rest of them saw modest discounts to their issue prices. The sentiment prevailing in the secondary market had its impact on the debut day listing gains. Car Trade IPO listed on Friday at 1 per cent discount at Rs 1,600 against the issue price of Rs 1,618.

Bank of America (BofA), has warned of a 9 per cent near-term correction for the equity market, saying the street has only limited runway to continue the rally that began in the second half of last year. 

"We expect the markets to correct near-term to the tune of 9 per cent. Our Nifty target is 15,000 by December implying a 9 per cent potential downside near-term," it said in a research note that was released post-market closing on Friday. 

It said an analysis of the past market rallies suggests the current rally has limited runway. The muted gains within IPO listings recently poses a risk to levered retail positions. The muted IPO gains in recent weeks could act as negative triggers, it noted.

"Our analysis of the past market rallies suggests that the current rally -- over 118 per cent in the past 73 weeks -- could have limited further runway. We see the risks of estimate reductions and with peak valuations, and expect the markets to correct 9 per cent near term with our Nifty target at 15,000 from the current levels," the note said.

"Our analysis of the past bull and bear rallies suggests a typical run of about 75 weeks, providing an average 106 per cent return. After such rallies, the market typically corrects about 30 per cent over a four-month period," the report said.

It further added that since the current rally has amassed a 118 per cent total return over the past 73 weeks, "we see limited further runway in light of emerging risks near term."

Gaurav Udani, Founder & CEO, Thincredblu Securities is also of the view that Nifty has corrected a bit over the last week. “We expect this correction and a slightly bearish sentiment to persist over the coming week. Nifty could retest its support levels of 16,150 – 16,000.”

Bank Nifty has been within a large range for a few months now, this week was quite bearish and we expect this sentiment to carry forward this week too. The banking index could potentially test and challenge support levels of 34,200-34,000, he said.

With the surge in cases of Delta variant in the western world, there is a feeling that the domestic markets have completely ignored the possibility of a third wave in the country or have turned a deaf ear to that possibility. With the US markets reacting to the sudden surge in Covid-19 cases and reacting negatively to the development, the domestic markets currently ruled by the retail investors have also begun to take note of the possibility of a third wave in the country. 

While markets have a tendency to advance, a single piece of bad news may create a downturn with double the ferocity, wiping out investor’s wealth in an instant. Hence, market participants must not underestimate markets and keep in mind that there are risks of a third wave. Although the tempo of industry recovery and immunisation is increasing, the ultimate dictator will be the intensity of the third wave and how investors respond to it if and when it occurs, Samco Securities said in its research note.

This is exactly the reason why after rising by 48 per cent in the first half of the year, the price of Brent has fallen by 11 per cent since the beginning of August. The major cause of correction is the extensive spread of Delta variant which is imposing mobility limitations and hurting demand, and an increase in the supply of 400,000 barrels per day by OPEC+ beginning in August. 

Shrikant Chouhan, Executive VP, Equity Technical Research, Kotak Securities, said, “Markets were broadly satisfied with the conclusion of the 1QFY22 earnings season, as Nifty 50 Index EPS estimates witnessed moderate upgrades. Now with result season behind, the markets will likely keep a tab on domestic and global data including Central Bank policy measures, inflation, commodity prices, and Covid-19 cases”.

Global markets witnessed volatility as Federal Open Market Committee (FOMC) meeting minutes suggested the increase of the likelihood of tapering of asset purchases in CY21. Investors also remained cautious around concerns relating to the delta variant of Covid-19. After witnessing some spike last week, the U.S. 10-year Treasury yield this week remained in a narrow range, closer to 1.25 per cent.

Foreign Portfolio Investors (FPIs) have been net buyers in Indian equities in Aug 2021 till date. FPI flows are expected to be volatile, given FOMC meeting minutes suggesting increased tapering likelihood. Tapering is expected to have a substantial impact on global equity markets.

This month, up to 20th August, the FPIs bought equity worth Rs 5,001 crore. This marks a shift in FPI's investment strategy in India where they had sold equity worth Rs 11,308 crore in July. Even in the second half of July.

In August so far, even though they have turned buyers, they are not investing heavily. This could be because of the latest Fed minutes indicating the possibility of 'tapering' by year-end, markets have turned a bit volatile.

“With the Dollar Index at around 93.57, its highest level since November last, FPIs are likely to be on a wait & watch mode, going forward. They are unlikely to commit big money until the Fed's views are made public after the crucial Jackson Hole meeting to be held between August 26 and 28,” said Dr. VK Vijayakumar, Chief Investment Strategist at Geojit financial services.

Now that the Taliban has again prevailed, we should consider whether its victory over the world’s most powerful military and the largest economy will have any implications for the dollar and its role in the world.

Rohan Patil, Technical Analyst, Bonanza Portfolio, said, “Nifty FMCG & Nifty IT outperformed and ruled the markets last week where FMCG index topped the chart with a gain of 4.76 per cent and IT index gained 2 per cent and continued to close higher for the straight 6th week.”

The FMCG index has broken out of a consolidation channel and has given an extremely bullish close on the last closing of the week, this has typically always been the trend, when the broad market indices struggle, FMCG comes to the rescue and becomes a safe haven for conservative investors. “We are staring at a blue-sky scenario for this index and we expect the bullish sentiment to continue on the back of dearth of quality investable universe,” Udani said.