Negative cues likely to haunt stock markets

Spooked by the closure of debt schemes by Franklin Templeton fund, several factors such as fears of an extended lockdown and its severe impact on June quarter earnings, fresh signs of a severe economic downturn, volatility in oil prices and wait-and-watch mode in global markets, the equity markets suffered losses in the previous week, reversing course after gaining for two consecutive weeks.

The Nifty lost 113 points, or 1.2 per cent, over the week to settle at 9,154 and the BSE Sensex corrected 0.83 per cent, or 262 points, to close at 31,327 points. Broader market comprising mid-caps and small-cap stocks corrected nearly three per cent.

Sharp rally in RIL post Facebook deal sustained indices from notching more losses during the week. Sectorally, pharma and IT outshone, while metal and auto underperformed. A series of liquidity packages approved by the RBI, as well as stimulus efforts by the Central Government, helped fuel the rebound of markets from the depths of the coronavirus selloff in late March.

However, as per RBI data, TRLTO 2.0 auction worth Rs25,000 crore was under-subscribed as the total amount of bids received were only Rs12,850 crore. This reflects the reluctance of banks to lend to small and mid-sized NBFCs and MFI players. The spotlight is now increasingly on Q4 corporate earnings.

On the back of Q4 earnings expect stock-specific movement in near term. Key earnings to watch out for in the coming week would be IndusInd Bank, HDFC Life, Ambuja Cements, Adani Power, Axis Bank, Hexaware Technologies, HUL, Tech Mahindra and ICICI Lombard.

So-called cyclical stocks, smaller companies and international companies could thrive if the economy stages an impressive rebound. On account of Maharashtra Day, markets will be closed on May 1 (Friday).

F&O/ SECTOR WATCH

Ahead of futures and options (F&O) settlement week, derivatives segment witnessed modest rollovers reflecting abundant caution. The options data indicated that the maximum Put base has shifted to 9,000 followed by 8,800 strike.

Put writers were most active at 9,000 strike with highest concentration of more than 30 lakh, while on the other hand, the 9,500 strike holds the highest Open Interest in Calls for the current expiry with more than 22 lakh shares. The Implied Volatility (IV) of Calls closed at 34.57 per cent, while that for Put options closed at 37.48 per cent.

The Nifty VIX for the week closed at 39.12 per cent and is expected to remain volatile. PCR OI for the week closed at 1.13 down as compared to last week at 1.34, which indicates Put unwinding. In coming week, the 9,000 level should act as a crucial support for the market and if market slides below this level, sharp slide to 8500 level is not ruled out.

Punters expect that market will consolidate at current levels in broader range of 8,700-9,300. Focus will be on stock- specific moves as ongoing result season could keep markets volatile.

Though Reliance Jio is yet to show how it is going to make money from its large consumer base, Facebook paying Rs 43,574 crore for a 9.9 per cent stake in Jio Platforms, implying a valuation of about $61 billion (Rs 4.63 trillion) for the RIL subsidiary was a big surprise.

Industry sources indicate that two wheeler sales are better than expected. Buy Bajaj Auto and hero Motocorp for short term gains. True to predictions, investors continued to pile into the pharmaceutical stocks.

Lupin, Dr Reddy, Biocon and Sun Pharma continued to flirt with 52-week highs. With many stocks trading at 30 plus P/E ratios, market watchers say high valuations are becoming a concern.

Avoid buying on bulges, use sharp corrections for accumulation. Stock futures looking good are Petronet LNG, Tata Chemicals, Sun Pharma, Tata Power, SRF and Mindtree.

Savvy old timers feel the present context is a once in a decade investment opportunity. A three pronged strategy is suggested. Firstly, it is pertinent to recall that over the past three decades, there have been only three instances of more than 40 per cent correction at index level.

At March 2020 lows, the Nifty has already corrected 40 per cent from its all-time high. Although short-term volatility and uncertainty is a norm after such correction, what transpires in following years is a multi-fold bull phase.

Bottoms formed after such corrections, have never been challenged again historically. Thus, from a technical analysis perspective, the current correction provides the requisite set-up for constructing long term portfolios.

Secondly, avoid value traps. One of the challenges in the investment process is overcoming bias. Investors tend to buy multi baggers of most recent bull phase, as they correct. It's prudent to look at performers of multiple bull markets rather than looking at only most recent data.

Thirdly, stick to consistent performers. Scanning the data through four major bull phases viz 1988-1992, 1998-2000, 2003-2007 and 2009-2017, to identify the businesses, which have consistently delivered returns for the investors in each of the bull phase.

Stock Picks

Dark Horse: Indian Energy Exchange Ltd is the company that offers an electronic platform for the trading of electricity products. Its products include day-ahead-market (DAM) electricity contracts, term-ahead-market (TAM) electricity contract, Renewable Energy Certificates (REC) and Energy Saving Certificates.

Its participants are able to participate in a uniform price double-sided closed auction process. Buyers and sellers electronically submit bids during the market session and the matching of bids is done on double sided closed auction mechanism with uniform market clearing price.

Its exchange enables trading in weekly contracts, which includes day-ahead contingency contracts, intra-day contracts, daily contracts and weekly contracts. RECs are traded on the last Wednesday of a month.

The company's electronic platform offers a suite of settlement services, including electronic trade confirmation, clearing services and risk management functionality.

The company is owned through diversified shareholding, and at the end of FY2018-19, its shareholders comprised non-institutional investors 47 per cent and foreign corporate bodies 22.10 per cent. Buy for target price of Rs275 in medium term.

(The author is a stock market expert. He is former vice chairman of AP Planning Board)