The IMF has said that India needs more structural reforms and fiscal consolidate, but it has projected growth to recover to 5.8% in 2021. (Photo: Mint)
The IMF has said that India needs more structural reforms and fiscal consolidate, but it has projected growth to recover to 5.8% in 2021. (Photo: Mint)

Market outlook: It’s not the time to throw caution to the winds

  • Still investors continue to keep the faith in India equities. The latest mutual fund inflows show that equity inflows have been strong
  • The virus has not been contained yet and the virtual shut down of the Chinese economy will weigh on Asian markets.

The news of the coronavirus escalating could continue to disturb the market in the coming week. It has spooked some of the Asian markets last week and even the Indian markets ended on a somber note. The virus has not been contained yet and the virtual shut down of the Chinese economy will weigh on Asian markets.

Besides, there is not much enthusiasm on the domestic front. The recently concluded results season, while not all that bad, has not kindled much hope that earnings growth is picking.

So the larger issue of reviving the economy continues to overshadow market sentiment. A shock drop in industrial production output for December has unnerved the markets. The index of industrial production (IIP) shrank 0.3% in December from 1.8% a month ago, which shows that the Indian economy may take time wade out of the woods.

Retail inflation has also flared up to 7.59%, though this may not be a cause for much worry. Much of this retail inflation is driven by a seasonal increase in food prices, which is expected to cool down in the coming months.

Further, telecom companies are back in the dock as the Supreme Court rejected their plea operators seeking time to settle AGR dues. This weighed on the sentiment in banking stocks because Vodafone India Ltd has large outstanding loans it owes banks. Nevertheless, Vodafone India Ltd continues to hang on as its Q3 performance seems to suggest that there is still some hope.

Meanwhile, the recent earnings season has been somewhat largely in-line with analyst expectations. However, the commentary from the management remains downbeat suggesting that earnings growth in the coming quarters is not going to come easy.

A few companies such as Nestle Ltd continue to deliver the goods which is why they command high valuations. Others such as ABB Ltd are still struggling to find their mojo in a slow economy.

Meanwhile, economic growth remains elusive. The IMF has said that India needs more structural reforms and fiscal consolidate, but it has projected growth to recover to 5.8% in 2021. Meanwhile, the rating agency S&P has retained the country’s earnings but warns that the fiscal situation is precarious.

Still investors continue to keep the faith in India equities. The latest mutual fund inflows show that equity inflows have been strong. Mid- and small-cap funds have also started to see some inflows as investors are looking beyond the large-cap stocks, which are commanding a high premium. Anyway, it’s time to be watchful and not throw caution to the winds, as the markets face near term challenges.

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