Market outlook for the next week (08-Jul to 12-Jul)

8 Jul 2024 , 09:14 AM

STORY OF SECTORAL INDICES IN THE WEEK TO 05-JUL

The week to July 05, 2024 was not only a week of positive market sentiments, but it also saw the return of alpha hunting as small and mid-cap stocks outperformed the large caps. FPI flows into equities were robust at $953 Million, resulting in an infusion of $5.91 Billion in the last 4 weeks into Indian equities. Among the heavyweights, IT continued to be preferred as a counterweight to the weakening rupee while Reliance again closed the week at lifetime highs. Here is a quick look at how the 20 key sectors performed in the week to July 05, 2024.

Sectoral Index	Weekly Returns	Index (05-Jul)	Index (28-Jun)
Nifty India Defence	13.74%	8,284.65	7,283.69
Nifty IT	4.32%	37,720.75	36,157.50
Nifty CPSE	4.16%	7,089.95	6,806.75
Nifty Healthcare	3.17%	12,975.30	12,576.25
Nifty Oil & Gas	2.65%	12,547.00	12,223.35
Nifty India Digital	2.32%	8,541.15	8,347.75
Nifty MNC	1.91%	30,940.85	30,362.40
Nifty Non-Banks	1.87%	25,014.15	24,555.40
Nifty Energy	1.76%	42,523.90	41,789.20
Nifty FMCG	1.61%	57,673.00	56,756.85
Nifty Metals	1.59%	9,970.50	9,814.30
Nifty Mobility	1.35%	21,444.60	21,159.92
Nifty Realty	1.30%	1,119.15	1,104.75
Nifty Infrastructure	1.28%	9,250.60	9,133.95
Nifty Logistics	1.16%	24,238.04	23,961.00
Nifty Automobiles	0.78%	25,398.30	25,200.60
Nifty Private Banks	0.73%	26,266.20	26,075.50
Nifty Banks	0.61%	52,660.35	52,342.25
Nifty Consumer Durables	0.31%	38,478.25	38,357.90
Nifty PSU Banks	-0.12%	7,356.75	7,365.95

Data Source: NSE

Here are key takeaways from the tabulation of weekly sectoral returns above.

• Let us start with the macro picture for the week to June 28, 2024. Out of the 20 key sectors, 19 sectoral indices gave positive returns, with only PSU banks giving negative returns for the week. The end of political uncertainty was also accompanied by VIX falling back to 12.7 levels, making it a buy-on-dips market for the traders. The next big trigger is the full budget in late July, and while the expectations are still positive, the government is likely to fire most of its reformist salvos in the Feb-2025 budget.
• Let us start with the top gainers for the week. Defence was back as the big theme of the week, delivering 13.74% returns in the week. Indian defence exports and Indian defence output has grown geometrically in the last few years and most defence players have overflowing order book positions. Defence stocks may be expensive, but nobody really is bothered. Among the heavyweight sectors, IT led the way with 4.32% gains, healthcare with 3.17% gains and oil & gas with 2.65% gains. They accounted for most of the Nifty rally in the week. Healthcare was the surprise package of the week.
• Only PSU banks gave negative returns in the week and that was also very nominal. Overall, banks, consumer durables and automobiles gave subdued returns of under 1% for the week. Private banks could have done better, but the performance of HDFC Bank on Friday took its toll. In fact, the sell-off in HDFC Bank was on the back of tepid business outlook given for the first quarter of FY25. PSU banks have been among the star performers in the last one year, and we are seeing some profit taking at higher levels.
• With 19 out of 20 sectors giving positive returns in the week, the arithmetic average of returns of these 20 sectors stood at 2.32%. Out of the 20 sectors overall, 15 sector reported more than 1% returns, while 12 sectors outperformed the Nifty index. The top 5 sectors delivered 5.61% returns on average, but that was skewed by the sheer outperformance of the defence theme during the week.

The big story in the week was that alpha hunting was finally back, with small caps and mid-caps outperforming the large caps.

WEEK THAT WAS; THE GOOD, THE BAD AND THE UGLY

For the latest week to July 05, 2024, the Nifty and the Sensex were up between 1.22% to 1.30%. However, the real story was in the small and mid-caps.  Here is what drove the markets during the week.

• The FPIs were net buyers in the Indian markets for the fourth week in a row. Since the Modi 2.0 government was formed, the FPIs have infused close to $5.91 Billion into Indian equities. Of course, it is still debt that accounts for close to 90% of the net FPI flows into India. However, equity flows had started looking for greener value pastures ahead of the election uncertainty. Now, those funds are coming back and that is the good news.
• SEBI moved decisively against Hindenburg Research in the 2023 Adani short selling saga by issuing them a show cause notice. There are several reasons SEBI has a strong case. Firstly, Hindenburg could never back up its allegations with concrete facts and that makes it more like a shoot and scoot strategy. Secondly, Hindenburg admitted that they had shorted Adani group shares ahead of the report. That is illegal and contravenes the applicable rules for FPIs. In short, considering the impact the report had on the value of Adani stocks, SEBI can very well pull them up, either directly or through the P-Note originators. Experts feel that SEBI may have a strong legal case here.
• Indian equities may be seeing caution from traditional FPIs and Private Equity funds, but sovereign fund are aggressively adding up a share of the Indian investment cake. In the recent past, 3 major sovereign funds viz. Government Investment Corporation (GIC) of Singapore, Abu Dhabi Investment Authority (ADIA) and the Kuwait Investment Authority have been adding up stakes in India. They are also lining up aggressive plans to expand their India portfolio in the coming months. That could compensate for the scepticism of the traditional foreign investors in India.
• The FOMC published the minutes of the June Fed meet during the week. The minutes continued to present an ambivalent picture of the rate strategy. What the minutes said was that, the data was still not adequate to give the FOMC members the confidence to cut rates. The CME Fedwatch is betting that the Fed will implement its first rate cut in September and then follow it up with one more rate cut in December. For now, the Fed minutes have not betrayed any such enthusiasm, when it comes to turning dovish.
• Brent Crude scaled a peak of $87.75/bbl during the week and this was driven by several factors. Firstly, US gasoline demand continued to be very strong. Secondly, the US API crude stocks saw a surprising drawdown of -12.5 Million barrels of oil in the week, which was largely responsible for the spike in oil prices. Of course, Russia is planning supply cuts towards the end of the year and that is going to add to the pressure on the oil markets. Oil traders are already preparing for Brent at $100/bbl in H2-2024.
• Talking of oil and Russia, Indian continues to rely heavily on Russia for its oil imports. In June, Russia alone accounted for 41% of the overall oil import basket. Iraq same in place with 16.3% in the import basket, followed at a distance by Saudi Arabia and UAE. The surprise was the US was the fifth largest contributor to the Indian oil import basket. India appears to be clearly reducing its reliance on the GCC nations for oil.
• The government may not hike its disinvestment target beyond ₹50,000 Crore in the full budget. The government is expecting buoyant tax revenues this year. To add to their joy, the RBI has already paid a bumper dividend of ₹2.11 Trillion for the year. This is likely to take the estimate of RBI dividend and bank dividends combined; to nearly 2.5 times the interim budget estimates. Not only does the government plan to rely on monetization pipeline for shortfalls, but clearly, they feel that there better ways to monetize PSUs than just selling minority stakes in these companies.
• HDFC Bank was in the news for the wrong and the right reasons during the week. Its Q1 outlook shows a visible slowdown in its performance even as it is desperately looking to hive off part of its loan portfolio to improve its NIMs overall. HDFC Bank is also looking to narrow its credit deposit ratio, something that sharply worsened after the HDFC merger. On the positive side, FPI holdings in HDFC Bank has fallen to 54.83%; below the MSCI trigger of 55.5% to trigger FPI flows. That could see HDFC Bank double its weight in the MSCI Emerging Markets Index, leading to higher allocations.

With the Sensex at 80,000, the obvious question is; what are the big stock market triggers for the coming week to July 12, 2024.

STOCK MARKET TRIGGERS FOR COMING WEEK TO JULY 12, 2024

Here are some of the key stock markets triggers that can influence the direction of the stock markets in the coming week to July 12, 2024.

• Nifty closed the week +1.30% up, Sensex closed 1.22% higher and the Nifty Next-50 closed +2.66% higher. With the Sensex already above 80,000, the big focus is now on whether the Nifty can also get to 25,000 in the current rally. But, the week belonged to the smaller indices with the mid-cap index up by +2.43% and the small cap index rallying by +3.40%. The focus during the week shifted largely to alpha hunting and with Nifty and Sensex at elevated levels, the focus is likely to shift more towards small stock alpha.
• Q1-FY25 results season kicks off this week with the standard large cap and mid-cap names. Some of the key large cap results for Q1FY25 expected this week include marquee names like TCS, HCL Technologies, Avenue Supermarts (D-Mart), IREDA, and Tata Elxsi. Among the smaller names to be announcing their quarterly results this week include Shalby Hospitals, Delta Corp, GM Breweries, Kesoram Industries, Anand Rathi Wealth, 5Paisa Capital etc.
• There are two economic data points that will be put out I this week. The India CPI inflation for June 2024 will be announced on Friday. In May 2024, the consumer inflation stood at 4.75% and it is expected to taper slightly in June. However, the focus would be more on food inflation with the Kharif season already underway. On Friday, the India IIP growth for May 2024 will also be also announced. Last month, IIP growth had come in at 5.8% and it is expected to remain in the vicinity of 6% this month also. The focus will be more on the manufacturing IIP.
• In key triggers from the US, the Fed chair Jerome Powell will testify before Congress on monetary policy outlook and monetary policy outcomes. The focus this week will also be on the OPEC meeting outcome as well as the US inventory drawdowns, which triggered a sharp rally in oil prices last week. With Brent Crude at $87/bbl, trades are already setting targets of $90 and $100/bbl in the near future. That will also have an impact on the US consumer inflation for June. It is likely to taper by 20 bps to 3.1%, but the focus will be on energy inflation.
• FPI flows will be in focus after $5.91 Billion was infused in 4 weeks. However, IPO markets are likely to be tepid this week with only two IPO main board listings scheduled of Emcure Pharma and Bansal Wire Industries. Rest of the action will be in SME IPOs.
• Finally let us turn to key US data points this week; which includes Consumer Inflation expectations, CPI, Core CPI, PPI, Fed Speak, Powell Testimony, crude stocks, Atlanta Fed GDP, jobs. For rest of the world (ROW); key data points are Current Account, IIP (Japan); CPI, PPI, Trade (China); Eurogroup Meetings (EU); GDP, IIP, Trade, MPC (UK).

In the coming week, the focus will largely be on India inflation, India IIP, and US inflation. But the big story will be how crude oil moves.

PARTING THOUGHTS ON NIFTY AND SENSEX NEXT WEEK

For the coming week, there are 3 things to keep an eye on.

• VIX has again sobered from 15.3 to 12.6 levels during the week. VIX spiked last week due to F&O expiry related volatility, but now looks likely to gradually converge towards lower level.
• For the Nifty, 24,300 has been just taken out and the next big target will be 25,000. Most of the shorts are covered and so there is the need for genuine buying now. It will depend on momentum in stocks like Reliance, Bharti Airtel, TCS, HDFC Bank etc.
• For the Sensex, the level of 80,000 has just been taken out; and if it holds with volumes, it should open the road for the Sensex scale above the 81,000 mark. Union budget hints, oil prices, and FPI flows will hold the key to the coming week.

Political uncertainty and VIX volatility are now history. The focus now shifts to the Q1 corporate results!