Sensex, Nifty see worst July in 17 years: Where are the markets headed?

Analysts say there is more pain in store for the markets, as both global and domestic developments are likely to dent sentiment further

Tax on foreign portfolio investors proposed in the Union Budget, weak corporate earnings amid a slowing economy and falling consumption dented sentiment in July with the frontline benchmarks – the S&P BSE Sensex and the Nifty 50 – slipping around 6 per cent. This was the worst month for the indices in nearly 17 years. On Thursday, the Nifty50 slipped below the 11,000 mark and has thus far tanked around 9 per cent from its 52-week high of 12,103.05 levels hit on June 3. 

Analysts say there is more pain in store for the markets, as developments – both global and domestic – are likely to dent sentiment further. Over the next few months, the progress of monsoon, which will have a bearing on inflation and the interest rate trajectory, corporate earnings and the overall health of the Indian economy, besides global cues, are some of the factors that will have a bearing on how the markets pan out.   

"The short-to-medium term outlook is clouded by what's happening globally and back home. We did not see as dovish a commentary as was expected from the US Federal Reserve (US Fed) when it cut rates by 25 basis points (bps) for the first time in a decade on July 31. Economic data in India, too, has been weak and there are issues with the new FPI norms as well. All this is making the sentiment weak. That said, we remain constructive and bullish on the markets from a long-term horizon," says Vaibhav Sanghavi, co-chief executive officer, Avendus Capital Public Markets Alternate Strategies. 

Among sectors, the public sector banks (PSBs), autos, metal and infrastructure were among the top losers on the NSE. The negative sentiment also did not spare fast-moving consumer goods (FMCG), pharma and information technology (IT) segments – considered a defensive and a safe-haven bet in a volatile market. The respective indices lost nearly 1–2 per cent in July 2019 on the NSE.

"The Nifty50 has broken a number of key support levels. It can slide another 3–5 per cent from here on. Investors need to be careful now, as the newsflow is not too encouraging. The FPI taxation issue needs a resolution. It is not the government's job to tell FPIs how to structure themselves. So in essence, the government is doing what it should not be doing," says U R Bhat, managing director at Dalton Global.

The fall in the mid-and small-cap segments has been even more. The Nifty Small-cap index lost 11 per cent, while the Nifty Midcap index shed 8 per cent in July. As regards corporate earnings, 28 Nifty stocks have reported their respective June quarter numbers till July 31. 

"On an aggregate basis, the performance posted by 28 companies reveals that while the top-line grew 8.2 per cent, the bottom-line has declined by 2.2 per cent. The performance posted by 21 non-BFSI companies suggests a net revenue growth of 7.3 per cent on year-on-year (YoY) basis, while the net profit declined by 11.1 per cent," says Jagannadham Thunuguntla, senior vice-president and head of research (wealth) at Centrum Broking.

As a portfolio strategy, Surendra Goyal, managing director and head of India equity research at Citi, increased his overweight stance on financials, primarily through addition of SBI Life in his model portfolio. His key overweight sectors include financials, healthcare/agrochem and utilities, while materials and consumer staples remain key underweight sectors.