Informist Poll

Worsening macros to keep Indian equities lacklustre in May

Informist, Wednesday, May 3, 2023

By Apoorva Choubey

MUMBAI – Indian equities are likely to take a breather in May as risk appetite around the world has weakened again due to worries about an intensifying slowdown in the global economy, sustained issues in the US banking sector, and cautious commentary from a few major domestic companies.

After four months of tepid movement, the Nifty 50 rose 4% in April, making India one of the best performing stock markets in the world for the month. These gains were supported by incremental investments by foreign fund managers amid signs of resilience in the domestic economy and stock valuations of some companies turning attractive.

May, however, could turn out to be a lacklustre month for Indian equities as both institutional and retail investors are expected to wait for key events to unfold, including the US Federal Reserve's monetary policy review, quarterly earnings of companies, and latest updates by meteorological agencies on the forecast for monsoon rains this year.

In a poll of 14 brokerage houses conducted by Informist, participants differed in their views about the equity market's direction in May. The poll signals a wide range of over 1,000 points for the movement in the Nifty 50 index.

The index will find strong support in the 17700-17800-point zone and then at 17500 points, the poll showed. It will face stiff resistance at 18500 points.

Today, the index ended a six-session rising run and fell 0.3% to 18090 points. The weakness was in line with global equities, which fell ahead of the outcome of the Fed's meeting later today.

While financial markets expect a 25-basis-point rate hike by the US central bank, the focus will be on where the Fed sees rates going through the year, analysts said.

"…the market is more interested in the Fed's future actions, and a hint of a pause in rate hikes would delight investors," Sunil Damania, chief investment officer at advisory firm Markets Mojo, said in a note titled 'Can the April rally sustain?'

On the other hand, another rate hike signal could dampen market sentiment, he said.

Damania believes the fresh crises in the US banking sector, such as that at First Republic Bank, and emerging problems in the commercial real estate sector in the world's largest economy are worrisome, and will be closely monitored by investors in the coming weeks.

Compounding the problem for investors is slowing growth in major economies such as the US and China, rising unemployment and high interest rates, all of which point to corporate profitability suffering for more months than earlier anticipated, noted the chief dealer at a Mumbai-based mutual fund house.

"The ongoing Jan-Mar earnings season has failed to impress equity investors, with net profit growth being restricted to low single digits on an average," the chief dealer said.

The commentary from companies hasn't been encouraging either. India's largest listed consumer staples company, Hindustan Unilever Ltd, witnessed tepid volume growth in the March quarter despite reducing product prices. The company has said the near-term operating environment is expected to remain volatile.

ICICI Bank Ltd, one of the country's largest private sector lenders, has warned that net interest margins have peaked and will moderate hereon.

Maruti Suzuki India Ltd, the largest carmaker in the country, hasn't provided visibility for the growth expected in the full year, and has predicted that Apr-Jun will be challenging.

Adding more uncertainty to the murky outlook for equities is the prospect of the El Nino weather phenomenon. The El Nino is a climate pattern marked by an unusual warming of surface waters in the Pacific Ocean. In India and its neighbourhood, this is associated with deficit rainfall and droughts.

The Indian Meteorological Department expects moderate El Nino conditions in the latter half of the southwest monsoon season.

Thus, the short-term outlook for Indian equities is uncertain and the movement in benchmark indices could be choppy in May, analysts say. Investors will closely watch the movement in bond yields, the rupee, and crude oil prices to gauge the risk-reward equation of being invested in shares, they say.

Despite the challenging environment, what will ensure that there isn't a big correction in equities is the strong conviction in India's long-term growth prospects, analysts say.

Moreover, Indian shares have underperformed global counterparts for the past six months or so, which means several stocks are available at reasonable valuations. The Nifty 50 is trading at a valuation close to its historical average, noted brokerage house IDBI Capital.

The movement in the equity market is likely to be stock-specific in the coming weeks because of the earnings season but overall, no major correction is expected, said Ratnesh Goyal, senior technical and derivative analyst at Arihant Capital Markets. If a major correction occurs, it would be a great opportunity to buy domestic shares, he believes.

Following are the support and resistance levels for the Nifty 50 for May, based on inputs from 14 brokerage houses:

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