Markets choppy till general elections

Markets have been volatile off late after an excellent November. Last month was a classic example of how macros and sentiment change from one extreme to another in a short period with crude prices moving southwards and Indian currency strengthening.

The vertical 29% decline in the global crude prices since early October'18 and the concerns about the US growth have abruptly shifted the consensus views back to deflationary risks, prompting increased prospects for an early culmination of the Fed's rate normalisation. There are therefore theories in the market about dollar weakening and flows resuming for emerging markets (EM) including India. Only time will tell whether such a scenario will enable the EMs to rally or the fears of the US recession will slow down proceedings everywhere.

Locally, the Reserve Bank of India (RBI) maintained a status quo on both the repo rate as well as its policy stance last week. An indication of more open market operations (OMO) in the coming months offered immense cheer to bond markets as the 10-year rallied significantly. Markets now expect the government's fiscal position also to be fairly stable if crude prices remain below $75/billion. Headline CPI inflation (3.3%) continues to undershoot expectations on persistently low /easing food price.

The market participants are in a wait & watch mode, as the results of state elections are due to be announced today. There can be immediate knee-jerk reactions on either side, depending upon the outcome. But in the medium-term, markets will revert back to focusing on fundamentals and more so earnings for the Q3.

Capacity utilisations, as per the RBI survey, have risen to 76.1% in Q2 vs 73.8% in Q1. Also, the performance of the industrial and capital goods companies has been spectacular this quarter. There is a visible uptick in the order flows and execution which can be attributed to the government capex. A substantial sequential improvement in the slippage/asset quality trends was noticeable in the Corporate Banks. Some slowdown in auto sales and consumption-oriented sectors has been evident in the last few months, which can be a short-term phenomenon.

The next few months before the general elections can bring in volatility, which can be put to use for building up high-quality business oriented portfolios with an ideal mix of consumption, financials and capex beneficiary businesses. The market pays a premium for simple stories. Stay away from the onions where you have to peel back multiple layers to understand them.

The writer is head of equity advisory, Centrum Wealth Management