Market climbing a wall of worry

Mumbai: Economic data points to all is not well with the Indian economy but the market benchmarks Sensex and Nifty-50 closed at new all time highs gaining 1.4 per cent. Brokerages say the market should now focus on fundamentals after the recent political developments.

A sharp fall in the global crude oil prices and improved manufacturing data for May triggered a rally in the market that led Sensex to close at a new record high of 40,267.62 up 553.42 points while the broader Nifty-50 index closed at 12,088.55 gaining 165.75 points. Foreign portfolio investors were net buyers of equities worth Rs 3,068.88 crore while domestic institutions were net sellers by Rs 462.69 crore as per provisional data.

Brent crude oil price marked a sharp drop to $60.55 per barrel while India manufacturing sector expanded at its quickest pace in three months in May on improved output and new orders as per the data released on Monday as the Nikkei Manufacturing index PMI increased to 52.7 in May from 51.8 in April.

However brokerages are worried about the market's rise when other economic indicators are pointing to a slowdown in the economy but they said that the market would rise ahead of the key events, the RBI monetary policy and Union Budget.

HDFC Securities said, "The Indian economy has been slowing down since the last couple of quarters -majority of the high frequency indicators such as vehicle sales, retail credit growth, air traffic and rural wages point to weakness in both, urban and rural demand."

In a note of caution HDFC Securities said, "Whenever the election outcome is favourable, there tends to be a short term spurt in market returns. However, over long term, markets seek direction from macro-economic indicators which highlight the overall health of the economy."

"Indian markets may remain buoyant till the forthcoming Budget is announced in early July (barring unforeseen global negative developments). Post this, it may undergo a period of correction/consolidation," HDFC Securities said.

Motilal Oswal in a note said, "The growth slowdown in the economy was highlighted by the fourth quarterFY19 GDP print of 5.8 per cent growth, a 20-quarter low. Other macro indicators also point towards the slowdown. Market's focus should now shift to fundamentals and the economy. The government's first 100 days agenda, the new finance minister's focus/priorities and her first budget are near-term important macro events along with the RBI policy in the first week of June 2019. We believe, the large cap versus mid-cap divergence should get corrected as liquidity environment gets better, domestic flows into equities pick up and earnings trend look up."

Kotak Securities too warned about high valuation risk currently in the market saying, "We find the market's reward-risk balance quite unfavorable given rich valuations for 'quality' stocks,” the brokerage said.