Why Positive Cues Keep Market Spirits High

Stock markets are going through a “what now?” moment. After seeing momentum gather steam early last week, they are back in volatile waters. Stocks unwound sharply on news that industrial production has been off the mark, and inflation is rearing its head again.

Last week markets started well, posting gains that saw the frontline indices surge by more than 2 percent. But late unwinding eventually saw them settling for gains of one percent, or 259 points.

The market’s wild swings are all too familiar. Stocks tend to surge when news is good, and slide when it is not. Stocks are all about favourable sentiment, news, optimism and large amounts of cash coming in.

Till now, investors were focusing on the better-than-expected earnings of many companies. They also focused on faint signs of a pick-up in the economy.

Now, after the factory output figures, they are once again turning their attention to, and asking tough questions about, the recovery. As core inflation has started to crawl up again, investors are worried whether the RBI will cut rates again.

They are also worrying whether foreign investors will continue to bring money into the country following the changes made to the double-taxation agreement that seeks to levy a capital-gains tax on investments made through Mauritius.

The problem for the market is that once it begins to start focusing on the negative news, stocks might continue to meander sideways or lower. This is happening now. And, till the next good news hits the channels, that the monsoon would be good and on time, this is likely to continue.

Another thing it is grappling with is how foreign investors are likely to react after the changes to the DTAA agreement with Mauritius. As the changes propose a capital-gains tax on fresh purchases of foreign investors registered through Mauritius, people are likely to return to the drawing board to re-calculate their tax liabilities.

In the next few weeks, we will know where foreign investors stand. Since Budget 2016, they have been instrumental in lifting sentiment, while domestic investors were conspicuous by their absence. Foreign investors purchased stocks worth more than Rs 30,000 crore, which pulled the markets up from the Sensex’s lows of 22,000 odd points.

But, as news flows have turned negative, cash flows into the market may shrink. Stock markets not only depend on positive news, they also depend on fund flows. And, judging by the present market mood, demand for stocks may wane in the next few weeks.

In the short term, stock markets may unwind gains made in the past few weeks until clarity emerges. In the long run, though, this may present a good opportunity to accumulate growing companies. Many companies have reported outstanding results this quarter. So, looking for companies that have low debt and good demand for their products is a wise thing to do now as chances are that entry prices are likely to get better.