Global Cues Point To A Bumpy Road Ahead

The sword of a US Fed rate hike is hanging over the markets yet again. The break from the rate hike cycle seems to be over as a consensus is building up within the US Fed to increase rates in June.

And the news has taken the wind out of the market’s sails. Investors were not expecting a hike until much later this year. Stocks are now likely to meander lower, if this bit of news turns into reality.

As this is likely to be a second hike in six months, it will also see the dollar gaining strength that could drive foreign investors to hedge positions on the currency as well. Stocks are going to see more bouts of volatility as markets have not priced a rate hike yet. The currency market could head lower, too.

Foreign investors are seemingly heading towards the exit doors. From being net buyers early March, foreign investors are now net sellers. Last week foreign investors dumped stocks worth Rs 2,100 cr.

Although, this is just an exit of ‘hot money’ from emerging markets via exchange traded funds, it’s bound to affect sentiments in the short run. Liquidity will start to move towards developed markets and the risk-off trade will turn markets black and blue.

The big worry for the markets is whether this marginal selling by foreign investors could turn into a full-scale sell off. If that happens, investors could once again begin to doubt whether the Indian economy is on a recovery path.

To keep matters subdued in the markets, there is no meaningful recovery in the economy just yet. The investment cycle has not yet picked up pace. The economy is seeing growth only in a few pockets such as consumption and IT.

Going forward, the gains for consumption companies on the margin front may be difficult to come by. Lower commodity prices has boosted the margins of several automobile and finished goods manufacturers, but a base effect is likely to kick in the coming quarters, while commodity prices are beginning to tick upwards.

At higher levels of 8000 on the Nifty, stocks were also getting priced higher. Valuations at 18-19 times forward earnings were beginning to get stretched considerably over the historical averages of 15 times earnings.

Global news is also weighing down Indian markets. The Chinese market has been on a tailspin for the last five weeks reeling from a slowing economy and a lacklustre growth outlook. This could weigh on Indian markets.

The monsoon has also not kept pace with the initial forecasts. Monsoons are slated to hit Kerala on June 7 now from June 1 earlier.

PSU banks are likely to see some correction as their clean up is stretching over to the next quarter or two. Heavy industries are not seeing a revival in order books.

In short, the markets are likely to take a breather from the bulls in the coming weeks.

For those looking for opportunities to re-enter the markets, the coming weeks may provide opportunities for extremely long-horizon investors such as over 3-5 years.

But in the meanwhile, buckle up for a bumpier ride.