Markets to remain under pressure this week

NEW DELHI: The Indian market may continue to remain under pressure in the coming sessions even after registering its biggest weekly slump in 7 months as local equity benchmarks- BSE Sensex and NSE Nifty- fell about 2.5% each, wiping out nearly R6 lakh crore from the market capitalisation of all the BSE listed firms.

Nifty and Sensex settled around the week’s low to close at 19,674.25 and 66,609.10 levels. All sectors ended in the red wherein realty, banking and metal were among the top losers last week.

Adding to the existing concerns such as expensive valuation, turmoil in Chinese economy, weakening of rupee and foreign investors not being too enthusiastic, equity market analysts see fresh headwinds to the Indian market in the form of higher-for-longer trajectory of global interest rates, weaker-than-expected domestic macroeconomic conditions (higher oil prices, weaker GDP recovery) and reemerging pressures on profitability.

“In our view, (1) higher-for-longer interest rates in the US may provide headwinds to recovery in IT sector revenues, (2) higher global oil prices may reverse some of the sharp recovery in profitability seen over 2HFY23-1QFY24 and (3) weaker-than-assumed tax collections and CAD may limit the flexibility of the government to support the economy,” said Kotak Institutional Equities in a recent report.

This assumption by the brokerage firm comes after the US Federal Reserve last week signalled that the high-interest rate regime would continue for a longer term and they might go for one more hike by the end of this year. Following the Fed meeting outcome, the US dollar and treasury yields rose. These factors put pressure on the stock market worldwide, especially in the emerging markets.

Joseph Thomas, Head of Research, Emkay Wealth Management, said that further rate hike concerns have rattled the markets with the US markets losing altitude first and followed by Europe and Asian markets.

“There is also an element of profit booking that is at work, though this may be a passing one, as also some selling by FPIs. The factors that have influenced the markets may continue to exert some pressure in the coming week too,” added Thomas.

Amidst the old and new challenges, foreign institutional investors (FIIs) continue to leave the Indian equity market. This month, in the fifteen trading days, so far, FIIs were sellers in eleven days. As per NSDL data, in September through 22, FPIs sold equity for R10,164 crore. In the cash market FII selling was R18,260 crore, so far this month.

V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said that since valuations remain high even after the recent pull back and US bond yields are attractive ( the US 10-year bond yield is around 4.49%) FIIs are likely to press sales so long as this trend persists.

“It would be irrational to expect the FIIs to buy aggressively when the US 10-year bond yield is around 4.49% and the dollar index is above 105. Even after the recent correction, Nifty is trading around 20 times FY 24 earnings, making India the most expensive market in the world,” added  Vijayakumar.

Commenting on the emerging challenges, analysts at Kotak said there is growing risks of weaker-than-expected profitability for many firms from (1) the recent steep increase in global oil prices and (2) related hardening in raw material prices for the automobiles & components (tires), construction materials and commodity chemicals sectors.