The domestic market had a surprise Santa Claus rally, albeit with lower volumes, which helped it bounce back from a massive fall of 500 points in Nifty in the previous week. The week gone by was full of pessimism, where markets all over the world stumbled. Equity markets the world over lost an eye-popping $3 trillion in December and $13 trillion year-to-date (YTD)! The wealth erosion would be equal to the combined market capitalisations of China, Japan and India. Bigger concerns are emerging in the US on the earnings front.
The year gone by saw a 25 per cent increase in profits of S&P 500 companies, which happened mainly on account of buybacks and such phenomenon is not expected to be repeated in the coming year. At best, one can expect normalised single-digit earnings growth. Meanwhile, the repercussions of trade wars are expected in 2019 and, thus, it is likely that markets will face more disappointments next year as well.
Even though analysts in the US, and even Mr Trump himself, are suggesting that US stocks have become a case for buy on dips, it would be too soon to say that the US market has reached a bottom; markets seldom make bottoms in a matter of weeks. Currently, the US government shutdown is just another excuse for the market to fall, given the rich valuations that US stocks are quoting at. Earlier, during a similar shutdown in October, 2013, the market actually kept on inching higher. This shows that the current fall in the markets is most likely being blamed wrongly on the government shutdown and it has been more due to high valuations.
Event of the week:-
Governments populist measures are on the rise and are still in a nascent stage. These measures, although meant for the betterment of the masses, would dent corporate earnings. Governments clarification on DIPP (Department of Industrial Policy and Promotion) for e-commerce platforms (such as Amazon, Flipkart, etc.) will create a level-playing field for lakhs of bricks & mortar players and end a regime of discriminating pricing policies, which were slowly killing the traditional businesses. Further, similar measures are expected to be introduced in healthcare, agriculture and other sectors, compressing profitability of either banks or corporates. The election conundrum will add further pressure for such moves, which may weigh down the market.
Technical Outlook :-
Nifty50 is slowly losing momentum on the higher side as visible from the formation of smaller-body candles, and the indicators are still in the red, signalling a sell mode. The rally was not supported with volumes and, therefore, selling is likely to emerge at higher levels. The 11,000 level in the Nifty50 will act as a strong resistance and, therefore, long positions should be avoided till the time the index breaches the 11,000 level decisively. On any weakness, traders can initiate shorts with levels above 11,000 as stops.
Expectations for the coming week :-
The domestic equity market is expected to remain volatile amid selling pressure at higher levels. International factors will continue to influence domestic investor sentiment. While domestic macros remain favourable, political uncertainty, strained global geopolitics and brewing trade wars will act as catalysts to create negative sentiment in equity markets. However, given the strong macros, buying may emerge at lower levels and, thus, investors are advised to remain cautious in choosing sectors and stocks to invest, or wait for sharper corrections.
Sectors to watch out before elections:-
Infrastructure, road construction and cement companies should give attractive returns even amid extreme volatility in the market in the runup to the elections as the government will try to speed up infrastructure projects over the next three months or so before the Model Code of Conduct for elections is enforces.
The government is likely to approve several projects in the roads and infrastructure segments, and orders worth over Rs 1 lakh crore are likely to be handed out to companies over the next few weeks.
Companies like KNR Construction, Dilip Buildcon, PNC Infratech and NBCC are likely to give good returns in the runup to elections.
Nifty50 ended the week 0.98 per cent higher at 10,860. Wish you a very Happy and Prosperous New Year!