Volatility of the kind that was witnessed in May would now come to an end and we would be entering the normal mode. First it was who would win the elections, then it was post the exit poll to actual results, and finally it was the cabinet formation. All of it are now behind us and markets look forward to Modi 2.0.
The benchmark indices have made new lifetime highs during the week. BSESENSEX gained 279.48 points or 0.71% to close at 39,714.20 points while NIFTY gained 78.70 points or 0.66% to close at 11,922.80 points. The broader indices saw the BSE100, BSE200 and BSE500 gain 0.73%, 0.77% and 0.82% respectively. BSEMIDCAP was up 1.01% and BSESMALLCAP gained 1.14%. The highs of the BSESENSEX was 40,122.34 points while it was 12,039.25 points for NIFTY.
May futures which was of five weeks and included the volatile and uncertain period of election outcome ended on a positive note. The series gained 304.10 points or 2.61% to end at 11,945.90 points.
Dow Jones was down sharply and lost 770.65 points or 3.01% at 24,815.04 points. The Dow seems to be caught in the thick of US China trade wars and technical analysts seem wary of the pattern emerging in the Dow. They believe this could be a head and shoulders pattern which is emerging and the breakdown of the same looks like playing out. This could be bad news for the Dow and probably the ongoing trade war, the issue with Iran and North Korea and of course the fight back home with Democrats may be some of the causes.
Modi 2.0 cabinet was sworn in and key cabinet members portfolio had some surprises. The administrative head of BJP who was widely believed to be given Finance was given Home Affairs. Similarly, the glass ceiling was broken when the former Defence Minister Nirmala Sitharaman was made the Finance Minister, India’s first lady at the post. Rajnath Singh was allotted Defence Ministry. Piyush Goyal was given his Railway Ministry with added responsibility of Commerce and Industry. As much as 40% of the outgoing ministry has been dropped and a 58-member strong cabinet sworn in. There is scope for up to an 81-member cabinet permitted.
Economic data during the week saw GST collection cross the trillion mark for the third consecutive month. The target for GST collection has been revised upwards but it still gives comfort. It would be interesting to see what changes the government does bring about to moving to one rate of GST in the budget slated for 5th of July. While it would not be one change on a single day there would be a gradual merging of rates over time.
GDP for the fourth quarter came in at 5.8% and for the full year 2018-19 at 6.8%. It’s a definite slowdown and would act as a strong reason for RBI to cut rates when it meets on the 5th and 6th of June for its monetary policy review meeting. With the same government coming back to power with a bigger mandate, inflation and fiscal deficit would certainly not be on the mind of RBI when they meet. While customarily they have changed the policy rates by the customary 25 basis points there is a strong case this time of taking a bigger cut. I believe the same could be 50 basis points this time around.
Maruti reported its poorest sales number in over seven years with sales at 1.34 lac vehicles, down almost 22%. Other auto companies too saw a slowdown. Maruti believes that sales would grow between 4-8% in the year 2019-2020. While if that happens, it would be a relief, currently the auto pack is under pressure.
Markets going forward would see the breadth improving with stocks from midcap and small cap participating in the rally. With the focus of the government spelt out and they hitting the ground running, one would see focus on job creation, reviving the economy and kick starting the same. With the fiscal deficit on track at 3.45% of GDP or 6.45 trillion, they can easily afford to loosen the purse strings and ‘buy growth’.
Markets would remain volatile but significantly less than what we saw in the last fortnight. Global cues particularly the US are giving one a feeling of being negative for the time being. In India we have expectations of a bigger rate cut in the coming week which would keep markets on their toes and react to the news as and when it does actually happen. The key for the markets would however be the broadening of the market depth. While the upside seems likely to remain reduced, it certainly does not mean the end of the rally. Select fundamentally good stocks as growth in infrastructure would be the key for job creation, kick starting the economy and the next round of reforms.
