June 3, 2018 / 7:43 AM / in 2 months

India Markets Weekahead: Mid-caps could turn a corner soon

REUTERS - Indian stock markets were optimistic during the week as crude oil prices dropped and the rupee recovered. Investors’ mood also tracked positive global cues as U.S. President Donald Trump revived a summit with North Korean leader Kim Jong Un.

A man walks past a screen displaying news of markets update inside the Bombay Stock Exchange (BSE) building in Mumbai, February 6, 2018. REUTERS/Danish Siddiqui/Files

Forecast of a favourable monsoon triggered buying interest. However, the Trump administration’s decision to impose tariffs on steel and aluminum imports from Europe, Canada and Mexico deepened fears of a trade war.

The Nifty ended the week higher by 0.9 percent at 10,696. The mid-cap index fell 0.3 percent while the small-cap index fell 1 percent.

Oil prices fell from a four-year high of $80 per barrel to trade near $75 as major producers Saudi Arabia and Russia hinted at a hike in output going ahead. There were reports that key OPEC members will meet on Sunday and likely discuss raising output. Oil was also affected by the rise of the dollar to a near seven-month high due to political turmoil in the euro zone.

Automakers put up a strong show in May as rising rural demand and the government’s infrastructure push propped up sales of two-wheelers, passenger vehicles and commercial vehicles.

Maruti Suzuki reported its best May sales growth in over a decade, driven by the compact segment. Tata Motors registered a 58 percent increase in sales and Ashok Leyland clocked 51 percent growth driven by commercial vehicle sales.

The government failed to receive any bids for its strategic divestment of Air India, with investors concerned about labour-related issues and the level of debt.

More importantly, the government left some of the finer aspects of the sale to be disclosed in the request for proposal and the shareholder agreement. With no knowledge of the terms, investors were unwilling to put in initial bids.

On the macro front, India’s GDP growth was better than market expectation and improved to 7.7 percent in Q4FY18 from 7 percent in Q3FY18. This is the fastest pace of growth in seven quarters.

The Bombay Stock Exchange (BSE) logo is seen under a bull statue at the entrance of their building in Mumbai, January 30, 2018. REUTERS/Shailesh Andrade/Files

The pick-up in growth was largely led by a 14.3 percent surge in investments - the fastest pace in at least 24 quarters. Growth, however, was aided by a favourable base (investments grew just 1.1% in 4QFY17 post demonetisation).

GDP grew at 6.7 percent in FY18, in line with advance estimates, compared to 7.1 percent growth in FY17. The combined output of the economy’s eight core sectors grew at a marginally higher pace of 4.7 percent in April as against 4.4 percent in March due to sustained rise in cement production and a spurt in coal output.

The government has met its revised fiscal deficit target for FY18. The gap for the year ending March 31 was 5.92 trillion rupees, or 3.52 percent of the full year’s nominal GDP of 167.73 trillion rupees.

On the political front, the ruling BJP and its allies suffered severe jolts in by-polls in 10 assembly constituencies and four Lok Sabha seats.

GST collections for the month of May were down from a record 1.03 trillion rupees in April but higher than the monthly average of 898.85 billion rupees in 2017-18.

The government is targeting 1 trillion rupees in collection every month and is hoping that anti-tax evasion measures, such as e-way bill, invoice matching and reverse charge mechanism will improve compliance.

All Indian states will implement the e-way bill system for intra-state movement of goods by June 3. The system is an important step in checking tax evasion under GST since all major movement of goods will now be documented and accounted for.

The RBI’s bi-monthly monetary policy meeting will be held on June 4-6, where some market watchers are bracing for a rate hike due to strong economic growth data for Q4.

On the macro data front, Services PMI data will be out on June 5. It rose to 51.4 in April from 50.3 in the previous month.

A lot of investors who enjoyed easy profits last year by investing in mid-caps have been unnerved by the recent battering endured by the segment.

History proves that large-caps and mid-caps do not sustain a negative correlation for too long, and the last few weeks is a long time for such a situation. One needs patience and conviction during such times.

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.

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