What's In Store For Markets?

The markets were priming up itself for a strong rally till last week until ‘Brexit’ happened. Domestic and foreign investors were accumulating stocks, and the markets appeared to be breaking out on the other side 8200 levels. Mid- and small-caps had just started to see an uptick in volumes. Now, the ‘leave’ vote has cast a pall of gloom and sent markets scuttling to levels of 8000. Next is what?

By the looks of it, bears are unlikely to yield any ground to the bulls, and are going to grab the opportunity to increase the pressure. Sales are rising and it can be seen from the huge volumes on Friday coupled with a sharp decline in the indices, a bearish sign. Besides, foreign investors sold stocks worth Rs 600 crore – largely on the last trading day.

While the Indian economy and markets are largely insulated from the UK events, global fund flows can change its course in the immediate short term. Funds are expected to increasingly move towards stronger currencies such as the US dollar as more ‘Brexit’ and related events play out the next couple of months. The UK parliament will have to move Article 50 to start the process of UK exiting the European Union. So till, then the downward tugs will continue in equities.

Besides, global growth is expected to turn sluggish, and that will impact Indian GDP growth. Brokerages are already cutting Indian GDP growth rates. The one good news is that global and domestic interest rates are likely to remain muted in the coming months. And the RBI could further cut interest rates. Demand for oil and other commodities in the global markets can slacken keeping international prices lower. In turn, domestic inflation will remain sluggish.
In the long run, there is no doubt that equities are in a good spot. Stock markets are clued to the consumption story, and lower interest rates in the next few months backed by lower commodity prices could further propel consumption in the coming years. The consumption sector is the biggest prop of the Indian markets, but more on that later.

But in the immediate term, what is likely to fire up the markets? The last time we have seen that equity markets rebounded only when foreign investors started to buy Indian equities in a big way in early March. Domestic investors were conspicuous by the absence during the initial phase of the last rally. Domestic investors are currently buyers now having purchased shares worth Rs 1,050 crore during the week, but if there is a prolonged selling in the markets, domestic investors will start to feel the heat.

In the immediate short term, the key, therefore, is to watch what the foreign investors will be doing. If they keep pressing the sales button in the next one or two weeks, it may be time to let the turmoil pass by, and wait for the markets to cool down.

Buying opportunities will come. The India story is strong. Just that the market momentum is week. So, while it’s good to look and go bargain hunting, it’s also good to keep a buffer of cash ready for more bargains.