Markets bleed: Is a storm brewing ahead of budget 2024?

Have the markets in India started to consolidate ahead of the union budget 2024 or are investors cutting bets on equities due to lower expectations of interest rates cuts?

By Nasrin Sultana

Published: Jan 18, 2024 06:23:22 PM IST

Updated: Jan 18, 2024 06:37:11 PM IST

It is often said rising equity markets just need a single unfavourable news to pale down the shine and optimism. This mostly holds true when markets are on an one-way journey northwards and does not really take long for sentiments to turn sour and fragile, leading one fall to other. The other way around also stands true.

The bull markets triggered by a slew of factors including election results in five states seem to have come to a screeching halt. In the last two days, the Sensex lost 2294.79 points or 3.14 percent while the Nifty also shed 525.5 points or 2.37 percent at the closing on Thursday.

“Strong retail sales data in the US, along with hawkish comments by US Federal Reserve spooked investors globally,” Siddhartha Khemka, Head - Retail Research, Motilal Oswal Financial Services says. He expects the markets to consolidate in a range with limited upside amid a global uncertain environment.

Aggressive selling in HDFC Bank shares continued for second consecutive day on concerns over its growth prospects ahead as net interest margins were squeezed high provisions and soft core fee income in December quarter.

“Investors are trimming bets on rapid US Federal Reserve cuts due to strong US retail sales and the resulting rise in global bond yields. Furthermore, oil price advances and rate escalation risks have led to disruptions in global shipping and crude production,”Vinod Nair, Head of Research, Geojit Financial Services says. Nair adds that broader market continued its selling pressure given the elevated valuation and profit booking with an aim for sector rotation.

What has made investors withdraw money from equities across the globe in most parts of Asia and the US in last two days is the worry that the US Federal Reserve may not be as eager to start cutting interest rates as soon as March after fresh data showed inflation ticked up in December. The US is "within striking distance" of the Federal Reserve's 2 percent inflation goal, but the central bank should not rush to cut its benchmark interest rate until it is clear lower inflation will be sustained, Fed Governor Christopher Waller said, Reuters reported.

Waller also added that the central bank should proceed "methodically and carefully," not make the sort of large, fast reductions used when the Fed is trying to bail out the economy from a shock or a pending downturn.

“Global shares traded mixed Thursday as pessimism spread among investors fuelled by a sense of resignation that the interest rate cuts long expected in March will not materialise due to stubbornly high inflation,” says Deepak Jasani, head of retail research, HDFC Securities.

A murky economic outlook in China also did not help matters. China's blue-chip stock index tumbled to a five-year low while the Shanghai Composite Index declined to its weakest since April 2020.

Also read: Will FIIs push Indian markets up this year? The stage looks set for a grand show

High risk perception

The continuous decline in India markets appear too far to end, as uncertainties remain while December quarter corporate earnings are underway and the government is set present the union budget next month. India VIX or the India volatility index often referred to as a fear gauge has heated up significantly in past few days.

The India VIX has risen 11.11 percent on Thursday alone, increasing 18.2 percent in January itself. The India VIX tracks investors’ perceptions of volatility for at least a month ahead, and typically, has an inverse correlation with the markets. The index at elevated levels indicates investors expect a major correction at least over the next month.

Which way markets may swing now?

Despite the hiccups in markets, analysts are expecting a steady run of equities in 2024. Emkay Global Financial Services expects the the Nifty to hit 24,000 by end of this year. As rate cuts dominate conversations for 2024, the brokerage firm believes the Fed would cut in third quarter of this year and RBI would follow suit almost immediately.

“This would drive a re-rating in the markets which would be visible more in small and madcap stocks than the Nifty. A BJP win in the April-May general elections is almost a done deal and focus is on the FY25 budget, with manufacturing and infrastructure the key themes. We also see possibility of a recovery in mass spending. This is not certain, but we think it is worth taking some exposure to play this,” says Seshadri Sen, head of research and strategist, Emkay Global Financial Services.

Indian markets made a stellar performance in 2023 as it emerged as one of the best performing markets, trailing only the US and Taiwan, led by factors such a solid domestic macro environment, strong domestic flows, resurgence of FII inflows, resilience in corporate earning, easing inflation fears and expectations of global interest-rate cuts.

Nifty outperformed both mid- and small-cap stocks in CY22. However, as fears of a global recession abated and earnings visibility improved, small- and mid-cap stocks outperformed Nifty in 2023.

“Going into 2024, we think India’s strong macro environment and expected US rate cuts are strong tailwinds for the Indian market. However, India’s rich valuations may be a worry as FIIs are likely to explore underperforming markets such as China and Europe,” says Kunal Vora, Director, Head of India Equity Research, BNP Paribas.