The National Stock Exchange’s 50-stock Nifty is finding resistance at 8,500 after having outperformed during the last couple of weeks, even when the global risk was increasing. Developed and emerging markets consolidated when Nifty moved from 8,000 to 8,500.
Greece’s ‘no’ referendum to the bailout package has taken Eurozone into an unknown territory. The fall in global markets is a display of its concern. But Eurozone countries are open for further discussion. There is still hope that the next set of talks will move in the right direction towards finalizing an agreement. Currently, funds are moving towards less risky assets. For example, during these times, US bond yield eased from 2.49% to 2.20%, but Indian bonds witnessed only a mild impact. And Indian equities continue to outperform despite increased global risks.
But lately, we are seeing a pause to this outperformance. India was focusing on domestic development while excluding external factors. But a possible Grexit and a sharp fall in Chinese markets led by correction in international commodities are directly impacting India’s performance. Though it is too early to conclude the finer reasons behind the volatility in China i.e. whether it is led by a market bubble or by instability in the economy, it will continue to impact global markets.
Looking at domestic factors, India had a growth of 8.4% in projects under implementation during June quarter. Also stalled projects have continuously reduced over the last few quarters (as per CMIE). New investment announcements during the quarter ended June 2015 have increased by 33% YoY to Rs 1.15 trillion. About 498 new investments were announced, but fresh proposals must be compared with the low base of June 2014 quarter, which may have been impacted by national election at the same time last year. Though it is a good start to FY16, it is too early to say that the investment scene has improved.
In the meantime, as a healthy sign, growth in the eight core industries touched a six-month high of 4.4% in May 2015. It had declined by 0.1% and 0.4%, respectively in the preceding two months. All the industries barring natural gas recorded a YoY rise in production in May. The Index of Industrial Production grew by 4.1% YoY in April 2015. This was significantly higher than the 2.5% recorded in the preceding month.
Now we are awaiting the Q1FY16 results, which are expected to stabilise the earnings outlook, as against the downgrading witnessed during the last two quarters. May be it’s a good time to wait and watch the corporates scorecard. Based on the initial reports, the expectations are low especially led by a sharp fall in commodities prices. But at the same time there is an expectation of stability to numbers compared to the washout during Q3FY15 and Q4FY15.
The monsoon has lost its strength compared to June. IMD expects monsoon for July to be below normal. However, it is unlikely to impact food prices since global commodity prices continue to be low.
On the positive side, FIIs are returning to the Indian market after a gap of two months (+Rs 40 bn from July 1 to till date). But risks of a Grexit and China concerns may turn FIIs cautious.
The week’s Pick
IndusInd Bank (IIB) will benefit from a recovery in Medium & Heavy Commercial vehicle segment that should lead to rebalancing of IIB’s loan portfolio in favour of consumer loans. It will improve margins due to 300bps higher yields on consumer loan. IIB has also consistently improved its CASA ratio (34% in 4QFY15), and is reducing rates on savings account deposits that will further benefit margins.