Can Bulls Stake Claim to The Indian Market? Outlook For Sensex

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INDA – Shanthi Rexaline of Benzinga.com takes a deep look at the Indian equity markets.

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From Shanthi Rexaline, Benzinga.com: Global markets lost some of the momentum built through the past two years in March, as the major averages wilted under selling pressure engendered by geopolitical and economic worries.

The ISHARES Inc/MSCI WORLD IX FD (NYSEARCA: URTH), which tracks the performance of the MSCI World Index – an index comprising large and mid-cap equities across 23 developed markets – is down 1.1 percent for the March quarter. Meanwhile, the iShares MSCI Emerging Markets Index (ETF) (NYSEARCA: EEM) is up only 2.5 percent.

The Indian market was not immune to the across-the-globe correction, as the Sensex squandered a solid start to the year and was largely bound southward since it hit a record high in late January.

The index got some reprieve, courtesy of a late-March rebound, and yet it is trading off its 2018 highs. We set out to discuss the trajectory of the Sensex for the rest of the year, and the likely factors that could be driving force of the markets.

How Sensex Fared Thus Far This Year?

The Sensex, India’s bellwether index designed to measure the performance of the 30 largest, most liquid and financially sound companies across key sectors of the Indian economy, was up merely 0.5 percent for the year (as of April 13).

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For CQ1, the Sensex was off 3.2 percent.

In comparison, this is how the major averages of the rest of the regions have fared (CQ1 performance):

  • The S&P 500 Index (U.S.) – (-1.2 percent)
  • Japan’s Nikkei 225 Average – (-5.8 percent)
  • Hong Kong’s Hang Seng Index – (+0.6 percent)
  • Australia’s All Ordinaries – (-4.8 percent)
  • France’s CAC 40 Index – (-2.7 percent)
  • U.K.’s FTSE 100 Index – (- 8.2 percent)
  • German DAX Index – (- 6.4 percent)

Since the Jan.29 all-time closing high of 36,283.25, the Sensex has shed about 5.6 percent (as of April 13). The peak-trough change thus far this year is 9.3 percent.

Factors That Contributed to the Q1 Pullback

Several factors, both domestic and overseas, spooked the market, dragging stocks into the red in the first quarter.

Overseas Drags

The equity markets in the U.S. hit the brakes this year following a stellar run in both 2016 and 2017 amid worries concerns inflation rearing its ugly head. This has led to a surge in bond yields across the globe.

The yield on the benchmark 10-year U.S. treasury bond yield peaked at 2.94 percent amid the market downturn on Feb. 21. Despite trading off the levels, the yields still remain elevated.

With the Fed staying on course on its monetary policy normalization path, inflation fears have also perked up worries concerning higher Fed rates.

From  the face of it, it looks like the Fed will step on the gas on rates. The minutes of the March Federal Open Market Committee, or FOMC meeting released April 11 suggested that a number of policymakers were of the view that the appropriate path for the fed rates over the next few years would likely be slightly steeper than they had previously anticipated, given the stronger economic outlook and expectations for higher inflation.

U.S. President Donald Trump, on his part, stoked market weakness through his belligerent stance on tariffs. Trump enacted the Sec.232 legislation, which imposed taxes on steel and aluminum imports. China is not the one to be cowed down, as it has send out threats to retaliate in kind.

Domestic Pushbacks

The Indian economy grew 6.6 percent in fiscal year 2017-18, which was impacted by the lingering impact of demonetization and the teething problems associated with the implementation of the GST. This was slower than the 7.5 percent growth in 2016-17.

The Reserve Bank of India, India’s central bank, in its April rate-setting meeting kept its main policy rate, namely the repo rate unchanged at 6 percent. The reverse repo rate, the rate at which the central banks borrow from commercial banks, and the bank rate were also maintained at 7.5 percent and 6.25 percent, respectively.

At the Aug. 2017 monetary policy meeting, the central bank lowered the repo rate by 0.25 percentage points to a 6-year low of 6 percent. This is despite inflation remaining above the central bank target of 4 percent. Since then the rate has stayed put at the level.

Annual retail inflation in March eased to a 5-month low of 4.28 percent from 4.44 percent in February. Despite trending above RBI’s target, the metric has come off its Dec’17 highs of 5.2 percent.

The persistent sojourn of inflation above the RBI’s target has left traders sleepless over whether an interest rate hike is in the offing.

The RBI could raise rates around the December quarter, although they will still remain accommodative, Dhaval Vyas, who runs a boutique investment research firm said.

“The focus would be on oil price and the monsoon season which are likely to play a major role in determining RBI’s monetary policy.”

The political picture has also left the future tense. The absolute majority the ruling Bharatiya Janata Party, or BJP, got in the 2014 elections gave it the leeway to pursue reforms unhindered. However, the scenario has now changed. In a recent state election in Gujarat from where Prime Minister Narendra Modi hails, the BJP could muster only 99 seats, down 14 percent from its tally in the previous election in 2012.

Additionally, one of BJP’s coalition partner – a regional party – has withdrawn its support to the Modi government, intensifying uncertainties surrounding the 2019 general elections.

The banking scam that hit the Punjab National Bank, a nationalized bank, in February impacted sentiment toward the sector as a whole. ICICI, a leading private sector bank, also came under pressure recently following reports of irregularities in advancing of loans. These issues plaguing  the banking sector, considered the pillar of the Indian economy, are seen as setbacks to growth going forward, in the form of a credit squeeze and surge in non-performing loans.

Looking Ahead

Experts are unequivocal in their view that the Indian market will continue to head higher, with most seeing the CQ1 pullback as a blip.

Some consolidation is likely in the June quarter, following which there could be resumption in the rally, according to Vyas. Vyas sees the Sensex at 38,000 by the end of CY18. He sees strong support for the index around the 33,800-34,300 zone.

There is still steam left in the market rally, according to a trader who has been in the market for about two decades.

“The long term – 2019-20 – appears to be bright, with Nifty, another key Indian stock market gauge, expected to scale new heights.”

At least one positive is the GDP forecast for the out-years. The Indian economy is expected to expand at a robust 7.3 percent clip in the fiscal year 2018-19, according to estimates released by the Asian Development Bank on April 10. The GDP growth is expected to accelerate to 7.6 percent in 2019-20, thanks to improved rural consumption, a slight increase in private investment and less drag from net exports. The RBI, meanwhile, estimates 7.4 percent growth for the current fiscal.

As it stands, inflation is expected to ease further in the coming months, allaying rate hike fears. In its bi-monthly monetary policy review held in April, the RBI forecast retail inflation of 4.7-5.1 percent for the April-September period, lower than the 5.1-5.6 percent it forecast in Feb.

India’s demographic advantages have vested India with the prospects of superior growth rates vis-a-vis other developed and developing economies, according to Vyas. The reforms implemented by the Indian government in recent years, overlooking short-term political repercussion, have attracted domestic institutional investments, helping India decoupled from the rest of the economies at least to some extent, Vyas said.

When asked if a firmer rupee will hurt the Indian economy, Vyas said the impact is likely to be minimal, given India’s limited reliance on exports.

From the overseas perspective, the momentum in the U.S. markets has seen a small setback, although remaining intact. Although politics and prospects of faster Fed rate increases could serve as headwinds, the market could receive a shot in the arm from strong corporate profit growth.

Vyas sees any fresh development in the Indian banking sector and state elections as major market themes for this year.

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With the government’s thrust on infrastructure and housing, organized real-estate space and infrastructure-related sectors could be on the radar, Vyas said. IT is the another sector which is likely to attract fresh buying this year, he added.

Technical Take

The most recent uptrend in the Sensex began in late-2016, which went unhindered until the setback in late-January this year. Thanks to the post-January correction, stocks are now at neutral levels, as suggested by the 14-day RSI, a momentum indicator, which is currently around  51.

The Sensex dropped toward its 50-day moving average, or MA, in mid-March before bouncing back. The 50-day MA, currently at 32,669 could serve as a strong support in the eventuality of a pullback.


iShares MSCI India ETF shares closed at $34.46 on Friday, down $-0.07 (-0.20%). Year-to-date, INDA has declined -4.46%, versus a 0.31% rise in the benchmark S&P 500 index during the same period.

INDA currently has a StockNews.com POWR Rating of B (Buy), and is ranked #34 of 75 stocks in the Asia Pacific Equities Ex-China ETFs category.


This article is brought to you courtesy of Benzinga.com.

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