Sept quarter results will dictate market direction
Auto, energy and realty have been big gainers since September 1
The market has surged to record highs through the past six weeks. The Nifty closed on Thursday at 18,338, having risen 7.4 per cent since early September. However, in fundamental terms, this is dangerous territory.
Valuations are elevated — if second quarter (Q2) results are disappointing, the market would correct. Besides, there are several global risks.
Petroleum and gas prices are high, and expected to rise. This may lead to higher inflation and put pressure on the trade account, since India imports over 85 per cent of crude and over 50 per cent of gas. Coal prices are also elevated.
There are also fears that
China’s real estate market could go into a tailspin, taking down the world’s second-largest economy. If US inflation rises, the US Federal Reserve may bring its taper plans forward, which would also lead to a risk-off attitude for foreign portfolio investors (FPIS).
But so long as the stock market trend is up, most traders will stay long.
It’s interesting to identify the sectors that have driven the current rally. The three sectors that have contributed the most to the Nifty’s rise are auto, energy and realty. Since September 1, the Nifty Auto index has risen 17.5 per cent, the Nifty Energy Index is up 21.7 per cent, and the Nifty Realty 32 per cent. The Nifty Bank has also beaten the market, returning 8.5 per cent.
The energy sector is responding to the bull-run in fuels, but this may be deceptive. Producers like ONGC and OIL should do well if fuel prices are up. The power sector is responding to a tight demand-supply situation, which has led to higher merchant prices, more volumes for merchant power, and anticipation that the electricity regulatory commissions will raise tariffs for generators tied to equity-linked tariffs. However, refining margins may come under pressure, and gains from inventory revaluation may not be enough compensation.
The rallies in auto and realty are based on hope. Big-ticket consumption is not back yet. Investors are hoping the festive season will lead to an improvement.
The underperformers include fast-moving consumer goods (FMCG), IT, pharma and metals. These have all delivered positive returns, but much lower than the broader market. The metals bullrun is directly connected to the China situation. The IT index wobbled because TCS delivered disappointing Q2 results, and pessimistic guidance. But Infosys, Mindtree and Wipro have since delivered strong Q2 results and good guidance.
In terms of specific stocks, the top five contributors to the Nifty’s bull-run in the last five sessions are HDFC Bank, ICICI Bank, Adani Ports, HDFC, and ITC. The Q2 results will come in for these companies over the next few days and those could impact the bull-run.