Markets to be on tenterhooks this week

Relief for stocks unlikely as investors stay risk-averse

Indian shares are expected to remain volatile on Monday, with the US benchmark indices on Friday falling to their lowest since August 2014, mainly on concerns over the health of the Chinese economy and falling global crude oil prices.

A sharp correction on Wall Street, oil prices slipping below $30 a barrel, and the China market entering a bear phase, will continue to add to the woes of the domestic market, which has declined over six per cent over the past two weeks. Even in the near term, the outlook for the Indian market remains weak, though a pre-Budget rally is expected going into February.

Sustained outflows from foreign institutional investors (FIIs) remain the biggest worry. The yields on the 10-year US Treasury notes dropping below two per cent indicates the money is flowing out of riskier assets and into safe-haven assets like bonds and gold. Bond prices and yields have an inverse correlation. Gold prices, too, have been firm, rising about three per cent since the start of 2016.

In the past two weeks, foreign institutional investors (FIIs) have pulled over Rs 5,500 crore out of Indian stocks. Experts are of the view that the selling pressure from FIIs is unlikely to subside which will hurt the market in the near term.

"Global emerging market (GEM) funds are the biggest FII money in India. As GEM continues to see redemptions, India will be a casualty," said Saurabh Mukherjea, chief executive (institutional equities), Ambit Capital.

Last week, the Indian benchmark indices fell nearly two per cent, extending their fortnightly fall to 6.3 per cent.

The risks emanating from China, especially on account of a devaluation of its currency, is significant; it will continue to haunt global markets, including India, say experts.

We think the early part of 2016 is going to be a tough period, mainly due to global uncertainties led by China. We think a depreciation of currency in China poses the risk of triggering a global currency war. While the Indian economy is relatively immune, the stock markets are linked; they cannot avoid the global pain," said market expert Jyotivardhan Jaipuria, who believes the clouds over India should lift as we progress towards the year-end, with our economy recovering and earnings growth finally becoming visible.

Kotak Mutual Fund Managing Director Nilesh Shah said: "One must remember that many of people's fears are known to the market, hence priced in." He added that the $70-billion bonanza through lower oil import bill and good monsoon would be visible on Indian markets at some point in time.

For now, though, the recent flow of domestic news has not been good.

Sanjeev Prasad, executive director & co-head of Kotak Institutional Equities, said domestic factors like weak macroecnomic data and disappointing results by Tata Consultancy Services, India's most valuable company - along with the continued worries over the China market - hurt investor sentiment.

Two sets of data released last week showed that industrial production in India slipped in the negative zone in November, and retail inflation inched up to 5.61 per cent in December from 5.41 per cent the previous month. The Index of Industrial Production (IIP), a barometer for the country's industrial output, reflects the pace of growth in various sectors, including electricity, mining and manufacturing.

Ambit Capital's Mukherjea says the Indian economy is undergoing a broad deceleration in economic momentum which will exert pressure on corporate earnings.

"The Indian economy has lost steam. We are in a difficult economic phase, where improvement will be hard to generate for several quarters. Corporate earnings have barely grown in the past five quarters. I think this will continue for few more quarters," said Mukherjea, who believes there is a possibility of the BSE Sensex falling to 22,000 in the near term.

Experts say the market will keenly watch the key result announcements next week.

Banking stocks, which have the biggest sectoral weight on the benchmark Sensex and Nifty indices, have been at the forefront of the ongoing market correction. Big banking names like ICICI Bank and State Bank of India have been the biggest contributors to the decline in the Sensex and the Nifty over the past two weeks. The decline for the banking sector index this year has been almost twice as much as the Sensex and the Nifty.

A weak outlook for the banking sector will continue to exert pressure on the market. Morgan Stanley said in a recent note that 2016 would be challenging for banks, as "growth will keep slowing, amid deteriorating asset quality".

Most banks, especially in the public sector, are trading below their one-year lows and are quoting below their book value.

"Stocks look cheap on a reported basis, but deteriorating fundamentals will likely make them cheaper. High-quality stocks should keep outperforming," said the Morgan Stanley note on Asia financials.

The US markets will remain closed Monday for Martin Luther King, Jr, Day.