Equity markets in India as well as around the globe have risen after the US Federal Reserve paused its rate hikes even though it warned that it is not the end of a rate hike cycle and hinted at raising rates twice more this year.
The US Fed kept its key interest rate unchanged at 5.1 percent for the first time after 10 consecutive hikes taken in order to combat high inflation. While the interest rate is still at the highest level in 16 years, inflation in India as well as the US has begun moderating.
On the back of this pause, brokerage house Emkay Wealth Management, in a recent report, observed that the decision has given a new direction to the equity markets.
"The equity indexes have moved up in the aftermath of the pause in the rate hikes by the RBI and the US Fed. The pause has brought about some clarity with regard to the fund flows into the Indian markets. Not surprisingly the foreign investors have also come back into the markets in a regular and consistent way. The FPI flows have been to the tune of $5481 million in equities and $238 million in debt (both FYTD), and $2672 million in equities and $679 million in debt (both CYTD). This is a precursor to the gradually shifting winds. A continuation of this trend would give a boost to the markets and also supply liquidity to the domestic markets," the brokerage explained.
Apart from the pause, which other factors will impact the outlook for equity markets going ahead? Here's what Emkay says:
OPEC intervention if crude prices dip below $75: According to Emkay, with the inflation under control, to a large extent, and the threats of a further spike in inflation more or evenly balanced at this juncture, the elevation in prices is likely to moderate.
"While climatic changes and the impact on food prices cannot be ruled out, the other major volatile component is the fuel which looks like it is more or less range bound. Any dip below the US$ 75 level has attracted action from OPEC +, and it has not been able to sustain above the US$ 85 level in the recent past. This is despite the demand factors that have a propelling effect on the prices, as the Chinese economy opened up from the pandemic shutdown. Because of these factors, the threat of higher interest rates and the resultant impact on the cost of funds is eased to a large extent," it said.
Improving growth rate to boost earnings: As per the brokerage, yet another factor for the markets is the rate of GDP growth. The last financial year witnessed a growth of 7 percent and in the current year, the rate of economic growth is expected to be slower bordering somewhere at the 6 percent level. While the forecast for growth for major economies is far lower, and growth in China is placed at around 4.50-5 percent, the rate of growth in India will stand out comparatively better, believes Emkay. This should provide an edge to the local markets in terms of their earning profile and momentum, it added.
Some sectors to add to the performance of portfolios: The brokerage expects three sectors - manufacturing, technology, and banking & financial services - to add to the performance of the portfolios. It noted that the earnings season has brought the performance of banks to the fore and most of the banks reported healthy earnings in Q4, accounted for mainly by strong credit growth. Meanwhile, it added that healthy margins with improving asset quality have contributed to the performance. The PSU banks too clocked in one of the best quarters so far. The rate cycle has almost peaked, but a cycle reversal is important for the banks. In due course, it will help them improve their margins in the coming quarters, it said.
It also pointed out that after the selloff in tech, the sector has stabilized at lower levels. The peak index of 38,860 was reached on January 10, 2022, and the lowest level it touched in the last year was 26,676 on April 19, 2023. Currently, it is trading around the 29,000 level. There is strong support at 26,800 as one can infer from a 5-year chart, and the first target on the upside is 31,106, noted Emkay.
For the manufacturing space, the brokerage believes that it is undergoing fast-paced changes with a huge outlay of government capex of ₹10 lakh crore, incentives to local manufacturing under the PLI scheme, and the extraordinary expansion of manufacturing exports. Exports rose from $290 billion in FY21 to $418 billion in FY22, which is a 40 percent growth and it expects the momentum will be kept up with the various programs mentioned earlier.