It was a good week for the bulls worldwide after Fed Chair Janet Yellen indicated that the U.S. central bank's rate increase will continue to be gradual, which means the era of cheap money won’t end anytime soon. Risk-on sentiment prevailed in emerging markets as a result.
Back home, a drop in retail inflation triggered hopes for a rate cut by the RBI. The trading glitch at the NSE on Monday turned out to be a trap for short sellers, who had to run for cover, resulting in a 100-point move. The Nifty and the Sensex hit respective new highs and consolidated towards the end of the week. The broader Nifty ended up 2.3 percent at 9,886 points.
Crude oil prices climbed nearly 5 percent for the week after the IEA said demand is increasing faster than initially estimated. Aiding sentiments were reports of declining U.S. oil stockpiles and Kuwait’s OPEC governor saying crude inventories will drop at a faster pace.
In India, technology shares were in focus after TCS and Infosys announced their first quarter results. TCS reported lower than expected numbers while Infosys managed to beat estimates. As with any bull market, the ongoing rally is witnessing an IPO mania. Some of the successful listings so far this year are Au Small Finance Bank, CDSL, HUDCO, Avenue Supermarts and Tejas Networks. The valuations of a few of them have doubled in just a few months. The manic rise seen in IPO scrips reminds me of the 2007 bull run where IPO stocks were the talk of the town and we witnessed new listings week after week.
On the macro front, CPI inflation fell to 1.5 percent in June from 2.2 percent in May. Core inflation fell to 3.8 percent, led by lower international oil prices. The base effect is expected to wear off from August onwards. IIP expanded by 1.7 percent in May, compared with 2.8 percent in April. IIP is likely to remain weak in June as sales may have suffered on account of destocking ahead of implementation of GST.
Talk of a rate cut by the RBI at its August meeting are getting louder. The central bank lowered its inflation forecast for H1 and H2 FY18 in its June review, and the current CPI reading is lower than expectation. This means there could be room for at least a 25 bps rate cut. It needs to be seen whether the RBI relents to market expectation since lower inflation could be a result of lower demand as reflected in the IIP data. RBI also needs to ask itself whether a rate cut can induce demand and help in increasing capital expenditure, which has fallen to a 25-year low with credit growth at the lowest in decades. The GST-related disruption may be felt in August when pre-GST inventories dry up and filing of returns start, which will result in reconcilation of input credit. If this phase passes off smoothly, then we can be assured that the GST implementation is successful.
The coming week sees June-quarter results picking up pace with prominent companies like Reliance Industries, ACC, Jubilant Foodworks, Crisil, Ultratech Cement, Wipro, Bajaj Auto, Kotak Bank and Ashok Leyland reporting their numbers.
The focus will also be on the month-long monsoon session of parliament, which begins on July 17. The government is expected to introduce a host of bills, and it will also be the first session after the GST rollout, which emans the impact of GST is likely to be discussed in both houses. The presidential election will also take place on Monday, though the outcome is more or less known.
The recent global rally has been able to withstand political upheavals and shocks, including the UK’s vote to leave the EU, Donald Trump’s election, international sanctions on Russia and tensions due to North Korea’s missle programme. Indexes are hitting new highs and valuation are severely stretched, worrying marquee fund managers.
There seems to be a major mismatch in India between macro data and the mood in the market. Corporate earnings recovery is at least 18 months away as the GST effect would be felt over the next couple of quarters. Lack of employment generation is a huge problem as millions of young people enter the workforce evey year. Even the IT sector, which led the employment and consumer boom in the past two decades, is waning.
The bulls seem to be riding a tiger and they can’t afford to get off. We are looking at a possible blow-out rally and a lot of gullible investors could end up losing their hard-earned money.
Ambareesh Baliga has about 25 years of experience in the stock market and has worked with Karvy and Kotak groups in the past. He is a regular market commentator on various business channels. He is a commerce graduate from Calcutta University and a qualified cost accountant.