Markets May Remain Rangebound But With Strong Undertone
After taking supports at crucial levels on the day of September F&O expiry, Indian benchmark indices attempted a bounce back driven by positive macroeconomic data. October 2017 started off with strong auto sales data which was a positive for auto stocks despite corrective sentiments prevailing in the markets. With model launches and festival season right around the corner, auto numbers witnessed an upswing, thereby boosting FY18 forecasts. September 2017 sales have increased offsetting rise in cess, price rise on premium vehicles, fuel price hike and economic weakness. To add to it, the re-stocking post GST roll-out also helped higher despatches. Another buoyant event was the core sector growth that hit its five-month high levels with 4.9% rise in August 2017 as against 2.6% in July and 3.1% in corresponding month of the previous year. Going forward IIP data is expected to expand from 1.2% in July to 2-3% as IIP holds nearly 40% of the core sector. Manufacturing activity too grew for the second straight month in September, driven by higher output and new orders. PMI came in at 51.2, equating August number, while services PMI posted a revival to 50.7 as against 47.5 in August, supported by new orders after assuaging of GST apprehensions. As a result, RBI maintained status quo on interest rates in its recently held bi-monthly policy. RBI maintained repo rate and reverse repo at 6% and 5.75%, respectively, ahead of subdued economy and growing inflation. RBI cut the growth forecast for FY18 to 6.7% from 7.3%. Moreover, it forecast inflation at 4.2-4.6% in H2FY18.
Nevertheless, DIIs have been tremendously pouring money and their net investments stood at Rs 64,550.64 crore, counterbalancing the sell-offs by FIIs, thereby stabilizing the markets. The FIIs' net investment stood at Rs 35,688.92 crore in 2017. The selloff by FIIs though is a result of geopolitical tensions, but continued sell-off would indicate subdued September corporate earnings and dollar appreciation. Companies have already started posting their quarterly results and markets would react to the frontline stocks earnings reports. The economy has been gradually slowing since second half of 2016, yet markets have been rising consistently from January 2017 with profit booking from August till date. At the P/E of 23-24, stock prices seem to be valued at premium. Considering the long term trend, markets are rangebound and would continue to remain strong, unless the levels of 31000 and 9685 are not breached on the Sensex and Nifty, respectively.
Even after that, markets would just enter the correction phase that would last up to 30,000 and 9,300 on Sensex and Nifty, repectively. We are still bullish on the markets in the long run, unless geopolitical tensions spook the markets and worsen the sentiments, extreme corporate announcements and fear of Modi government getting defeated in the upcoming national elections. As it is, the government could prepone the elections this time around and hold the state and national elections simultaneously in 2018.