Poll results will pivot market sentiment

Technically speaking, the Nifty has risen through April-May. The current target would be 10,900-10,950 but a BJP win in Karnataka could super charge the uptrend to test the all-time highs at 11,170

The short-term market sentiment could pivot one way or another, depending upon the results in the Karnataka Assembly election results today. If the BJP wins a clear majority that’s likely to super charge the bull run and it may push the markets to new alltime highs. A win by the Congress would probably trigger a correction, while a hung Assembly could mean a waiting period until clarity emerges.

Karnataka aside, geopolitics could prove a dampener. Donald Trump deciding unilaterally to re-impose sanctions on Iran will lead to persistent upwards pressure on oil prices and it could hurt India, in particular. India is the second largest importer of Iranian oil (after China). It is also building Chabahar Port and hopes to create a road-rail network reaching from there into landlocked Central Asia. India would also like to be involved in developing Iran’s giant gas fields. All of that is now at risk.

Apart from Iranian exposure, higher oil prices could push up the current account deficit, to 2.4 per cent of the GDP (assuming that the Indian crude basket averages out at $65/barrel), or even higher, in 2018-19. The Indian crude basket cost around $75 through early May and the benchmark Brent rose to $78 after Trump’s decision was announced. Fears of a burgeoning CAD has already put pressure on the rupee, which has been sold down to below ~67.5.

The other cloud on the macroeconomic front is higher inflation. The wholesale price index for April was running at a four-month high, with 3.18 per cent increase year-on-year (YoY). That was about 25 basis points above consensus estimates. The consumer price index was expected to print at 4.4 per cent YoY and it came in at 4.58 per cent, which was also a little above consensus.

Given fears of inflation fuelled by higher energy prices, and stubbornly high core inflation (inflation minus food and fuel), the RBI’s next policy review in June could be hawkish. The minutes of the last meeting indicate that at least a couple of Monetary Policy Committee members are braced to hike rates.

The purchase managers’ indices for April indicate that expansion continues across both manufacturing and services and the momentum may have picked up. The PMI for manufacturing was at 51.6 (April) over 51 (March). (Any number over 50 indicates expansion, monthon-month). It’s the ninth consecutive month of expansion in manufacturing.

The services PMI was at 51.4 (April) compared to 50.4 (March) and that was backed by what’s been hailed as the fastest jobs growth rate in seven years. The composite PMI was at 51.9 (April), a material increase in momentum over 50.8 in March.

The index of industrial production (IIP) for March is also available. The IIP showed expansion at 4.4 per cent YoY for March 2018. This was a slowdown compared to 7 per cent growth in February. A Reuters survey had a consensus estimate for IIP growth of 5.9 per cent. Just 11 of the 23 industry groups showed positive growth in March. The highest negative contributor was jewellery, probably hit by the PNB fraud. The capital goods segment (a proxy for investment activity) also contracted 1.8 per cent.

Through fiscal 2017-18, the IIP registered 4.3 per cent growth, a little lower than 4.6 per cent in 2016-17. Despite these data, the RBI Governor, Urjit Patel, told the IMF that investment activity is picking up and should be sustained. The IMF projected that GDP would grow at 7.4 per cent in 2018-19, while the Asian Development Bank and the World Bank projected the Indian economy would grow at 7.3 per cent. In 2017-18, growth was around 6.6 per cent.

Corporate results have, so far, been broadly along expected lines. There’s high single-digit profit growth in most sectors with about 300-odd companies having reported in. Interestingly, private banks such as ICICI Bank and Axis Bank have been bid up by investors, despite delivering horrible results. Apparently market watchers believe that the process of NPA recognition has been accelerated. The major public sector banks have not yet reported in.

There have been multiple mergers in the recent past. The Fortis Healthcare deal is close to being consummated with the Munjal-Burman combine ready to put ~18 billion of equity into the healthcare business. The unlisted Flipkart has made more waves of course, with a mega $16-billion deal on the table. Most of that money will be paid by Walmart to overseas investors who are cashing out. Flipkart also has vast losses and it will interesting to see how Walmart tackles the management of its new acquisition. This will also be a test case for the tax authorities, and it could shake up both brick-and-mortar retail as well as ecommerce.

In the new fiscal, domestic institutional investors (DIIs) remained strongly net-positive on equity in April and May. Foreign portfolio investors (FPIs) have been net sellers of equity and more importantly, massive net sellers of debt. Mutual fund inflows in April remained strongly positive. That, along with rising indices, indicates that retail investors who also directly dealt in equity remain positive as well.

Technically speaking, the Nifty has risen through April-May. The current target would be 10,900-10,950 but as mentioned above, a win for the BJP in Karnataka could super charge the uptrend to test the all-time highs at 11,170.