Volatility To Keep Investors On Toes

If we take look at the performance of Indian equity markets in the preceding week, the Indices ended the week with marginal gains despite initial concerns over a likely rate hike in the US. Both Sensex and Nifty came back to life on Wednesday after consolidating for six days in a row. For the week ended September 19, both the benchmark indices rallied 0.1-0.2 percent.

However the mid-cap space and even the small cap space gave investors a run for their money this week; CNX mid-cap corrected over 1.5 percent while small-cap lost 0.2 percent gains. We feel the Fed scare seems to have pushed investors on the back foot as market participants come to reality that capex cycle is yet to revive and valuations have outrun the fundamentals in cyclical and banking stocks. However the demand for traditionally defensive themes such as pharmaceutical and information technology were in play this week even as capital goods and infrastructure took a back seat.

Amongst different sectors, demand for software stocks this week inflated the BSE IT index by 2 percent. Pharma index and auto gained 1-1.4 percent. CNX Capital goods, infra slipped 1.6-2 percent this week, metal index was down 3 percent. Another factor to be noticed is, the ruling BJP’s poor performance in the by-polls further weighed down sentiment. However, the mood perked up after the Fed retained its earlier stance of keeping interest rates historically low for a “considerable time”, sparking a rally in equity markets globally.

As for the coming week, there are few geo political factors are likely to drive the markets. While the market mood is positive, a flare-up of tension in the Middle East could hit sentiments. Sudden tension in US-Syria, Iraq crisis led to downgrade in global risk appetite. We believe bulls would remain on a longer term basis and recommend investing stock specific basis.

On the global front, the US stock market finished an upbeat week on a mixed note. The S&P 500 shed less than a point, ending the week higher by 1.3%, while the Dow Jones Industrial Average (+0.1%) cemented a 1.7% advance for the week. High-beta names underperformed, which weighed on the Nasdaq Composite (-0.3%) and the Russell 2000 (-1.3%). Equity indices displayed strength in the early going with the S&P 500 tagging the 2,019 level during the opening 30 minutes of the action. However, that represented the high watermark for the benchmark index, which returned to its flat line by the close.

The early advance followed the failed independence referendum in Scotland, which averted a potential storm in the financial markets. Once the uncertainty was cast aside, participants directed their focus to the Alibaba Group IPO, which represented the largest public debut to date. Shares of Alibaba opened at USD 92.70 after pricing at USD 68 per share, but could not settle above the opening print.

As for the Asian Indices, the stocks fell, as SoftBank Corp. drove Japan’s Nikkei 225 Stock Average lower and Hong Kong equities retreated. The MSCI Asia Pacific Index dropped 0.5 percent, with the Nikkei 225 declining more than 0.75% as SoftBank valued its stake in Alibaba Group Holding at less than analysts estimated. The Hang Seng Index tumbled more than 1%. Taiwan Weighted is also down 1.26% with Shanghai Composite declining 0.79%. SGX Nifty is also indicating towards the negative opening with the index losing 0.65%.

However the coming week is very important as it is a September month F&O expiry week happening on Thursday 25, September 2014. Ahead of RBI Meet scheduled on September 30, 2014 it will be a crucial closing to look at. With the US Fed maintaining its dovish stance and hawkish undertone, we are expecting RBI also to follow the similar suit. However any kind of cur in repo rate is not expected. As regards expectations about the markets this week, the opening is likely to be a soft one. But going ahead we expect a lot of volatility ahead of F&O expiry.