Markets extended their winning streak to the fourth consecutive week as expectations of easing trade tensions between China and the United States cheered traders. A largely positive earnings season added to sentiments and relieved market fears on the valuation front.
The week was a volatile one, with markets starting on a dull note on worries of a crisis in Turkey and recovering as the week progressed. For the week, the Nifty ended up 0.36 percent or 40 points to 11,470. On the sectoral front, the pharma index surged 6 percent, the IT index gained 3 percent while the FMCG index was up 2.7 percent. The mid-cap and small-cap indexes outperformed marginally, up 0.59 percent and 0.49 percent.
Crude oil prices fell for the seventh trading week on supply glut worries in the global market. Gold prices saw the worst week in the past 15 months on the back of a stronger dollar and subdued investment buying. Spot gold prices dropped by 2.9 percent.
The rupee depreciated to a low of 70.4 per dollar, tracking similar movements among emerging market currencies as the economic crisis in Turkey intensified, leading to a sharp fall in lira. Factors such as emerging market currency movement, dollar strength, and trends in crude oil will drive the outlook for the rupee in the near term.
Rating agency S&P said in a report that most domestic corporates, barring a few, can withstand the ongoing rupee plunge as the share of their dollar-linked earnings largely balances the share of their debt repayable in dollars. The report said a few of them will be negatively affected, but not severely enough to impact their credit ratings.
In his comments on the rupee, senior cabinet minister Arun Jaitley said the recent developments relating to Turkey have generated global risk aversion towards emerging market currencies. He added that India’s macro fundamentals remain resilient and strong.
Base metals saw a downtrend this week, mainly due to a strengthened dollar and disappointing Chinese economic data. Copper prices were weighed down by wage negotiation talks at Chile’s Escondida copper mine, the world’s largest. On the other hand, a sharp fall in zinc prices was cushioned by supply worries after Chinese government data showed that refined zinc output had dropped to its lowest since August 2013.
On the stock-specific front, Sun Pharma was the top gainer, up 12 percent during the week. The pharma sector has been doing well on U.S. FDA approvals and an improved performance in the recent quarter. Management commentaries also indicated a bottoming out of the sector.
GMR Infrastructure was in the limelight after reports said the company is set to list its airport arm, GMR Airports Ltd, on the bourses.
The RBI monetary panel’s minutes of its August meeting showed that the impact of financial market volatility, currency and trade wars was among the top factors debated and looked at from both growth and inflation angles. Ratings agency India Ratings and Research revised down India’s GDP growth forecasts for the current financial year to 7.2 percent from 7.4 percent. The key reasons cited are headwinds emerging from a rise in crude prices, fixing of minimum support prices, a depreciating rupee as well as no visible signs of reduction in non-performing assets among banks.
On the macro front, IIP rebounded to a five-month high of 7 percent in June, aided by strong growth in the manufacturing and capital goods sectors. India’s trade deficit in July widened to $18 billion, the highest in five years, fanned by a higher oil import bill.
Globally, business activities in China cooled further in July, with investment slowing to a near two-decade low. In the United States, retail sales rose 0.5 percent in July. Second-quarter productivity rose 2.9 percent, the highest rate in more than three years.
For the coming week, U.S.-China trade talks will be closely watched. Reports indicate that a Chinese delegation will meet U.S. representatives and talks will take place in Washington on Aug. 21 and 22. However, chances of a breakthrough remain bleak for the time being.
With positive momentum building up in the market and earnings out of the way, domestic liquidity flows may again help the markets gain further. Global concerns on Turkey and the effect on emerging markets seem to have been absorbed by the markets, thus any resolution on that front could be positive. I would advise holding positions to ride this rally, which is still in its initial stages. I believe that the mid-cap and small-cap indexes could outperform the headline indexes over the next two months.
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.