(Bloomberg) -- Before the trading day starts we bring you a digest of the key news and events that are likely to move markets. Today we look at:
- Nifty set for August breather
- 2007-style warning for valuations
- Rupee’s performance shifts
Good morning, this is Ashutosh Joshi, an equities reporter in Mumbai. Correction warnings have been piling up, with stock valuations stretched and a seasonally weaker month. Traders also face a sea of red across Asian equities following a selloff in US tech overnight. It remains to be seen if dip buyers wade in to help the Nifty sign off with a ninth week of gains.
Nifty’s august start: a prelude to sideways movement
Despite the Nifty 50 making a strong start by crossing the 25,000-mark Thursday, history suggests that this month could be more about consolidating the gains from the post-election rally. The benchmark index has averaged mere 1% gain over the past decade. With several technical indicators signaling overheated market conditions, equities are likely to drift sideways in the coming weeks as traders seek fresh cues for forward momentum.
Valuations cast a shadow over Indian stocks
Pricey valuations long been a feature of Indian equities, but the latest rally has pushed them to new extremes. Some strategists are comparing this scenario to the peaks seen in 2007 before the financial crisis. According to Nuvama Institutional Equities, local shares are currently at extreme levels based on absolute valuations, market breadth, and relative comparison. This could lead to subpar five-year returns, potentially less than 5% CAGR, with significant risk of large drawdowns. However, strong investment flows make it difficult to predict when the market will top out.
Rupee sees turnaround from top performer to laggard
After a strong first half of the year where it beat emerging market Asian currency peers versus the dollar, the rupee has now become the second worst performer this quarter, just ahead of the Taiwan dollar. This shift coincides with a weakening dollar as market expectations of interest rate cuts in the US increase. The RBI’s policy of smoothening currency swings by adding to or dipping into record high foreign reserves has played a key role. This strategy makes the rupee outperform when the dollar is strong against regional peers, but it lags when the dollar is on the backfoot.
Analysts actions:
- ACC Cut to Reduce at Dolat Capital; PT 2,630 rupees
- Ambuja Cements Cut to Sell at Dolat Capital; PT 616 rupees
- GE T&D India Raised to Hold at Prabhudas Lilladher
- HeidelbergCement India Cut to Sell at Elara Secs India
- Reliance Cut to Neutral at New Street Research; PT 3,400 rupees
- Welspun Living Cut to Hold at Sushil Finance; PT 209 rupees
- Tata Steel Cut to Sell at Investec; PT 135 rupees
Three great reads from Bloomberg today:
- JPMorgan to Monitor Indian Bond Liquidity After Investor Curbs
- Big Take: A 600% Gain Shows Cable Makers’ Green Energy Windfalla
- Modi Can’t Build the Military India Needs This Way: Mihir Sharma
And, finally..
After trailing some of their regional peers earlier this year, stocks in India are rapidly catching up. The MSCI gauge of Indian shares has jumped over 20% this year, closing the gap with Taiwan, Asia’s top performer, from 20 percentage points in early July to just 13. Despite some unexpected setbacks, a flood of liquidity has been driving local shares higher. The June quarter earnings are off to a lackluster start, but investors see this as just a temporary hiccup given the strong outlook for the nation’s economic growth.
--With assistance from Chiranjivi Chakraborty and Alex Gabriel Simon.
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