As expected the market has moved to a consolidation phase due to mildly subdued Q3 results in banking sector and heavyweights. And also, since so much is already factored in the market which is at a new zone about budget expectations. It is fair to expect a mild consolidation, which will continue for the short-term after the solid performance of the last one-month with fantastic gains in mid and small caps. On 17th January, the pre-budget rally has been solid with Nifty 50 up by 1.5%, Nifty Midcap 100 by 6.7% and Nifty Smallcap 100 at 10.5%, on MoM basis. For further direction a lot will depend on the actual budget announcements and the performance of Q3 results which should show improvement in economic activities across the segments. Also, sharper than expected increase in inflation much above RBI’s target is expected to stay for two to three months which has shifted the expectation on interest rate cuts from H1CY20 to H2CY20. The market is trading at premium valuation limiting the opportunity to perform well in the short-term. Having said that the broad market is still very solid in expectation of re-rate in valuation supported by revamp in earnings growth in the future.
Globally too, the completion of the US-China deal has provided an opportunity to book profits as the event has ended in-line with the expectation. The second phase or final phase of the deal is expected during March 2020. This will be the focus area for the market and will note the developments of ongoing mutual discussions. As per the phase one agreement, the new tariff rates will be on hold till the final Phase two agreement. Though Phase one has paused tension and uncertainty experienced the last one year, yet they are far from solving all their conflicts. Trump’s impeachment trial will take place this week and Democrats are preparing for the first contests of the primary season.
The market is very hopeful about the union budget and expects incentives to be provided to the equity market in terms of relief from long-term capital gain tax and distribution tax. In overall terms, the expectation from this budget is very high with factors like positive measures to industries, cut in tax for common-man and schemes for rural market to boost consumption. Sector-specific goodies are also expected for segments like Auto, Infra, Realty, Aquaculture and Housing. In terms of fiscal deficit, market is even ready to handle a fiscal deficit in the range of 3.6% to 3.8% for FY20 against 3.3% announced in the last budget. It is also expected that for FY21 fiscal deficit target will be prepared with some ease or flexibility, considering the requirement of growth for the economy as the main agenda. The government is expected to present a realistic assessment of the economy, forecast and measures to place the country on the path to USD 5trn target. This week Banks, Auto & Midcaps are consolidating due to marginal slippage in NPAs & growth than anticipated earlier. The Q3 result had solid expectations but actual results are marginally below expectations for sectors like IT and Banks, impacting the market. A lot will depend on the actual outcome of Budget for further direction, market is turning cautious before the big event.