“Stock Markets enter panic mode”, “Madcap selloffs send mid and smallcap stocks tumbling”, “Traders go for bearish bets” – The week gone by saw these kinds of headlines in financial dailies, and guess what happens thereafter?
Not once but every time the market witnesses such pessimism, a recovery is inevitable. Indeed, the market experienced a V-shaped reversal in small and midcap stocks after a panic bottom caused by the ASM measures. Nifty midcap index has declined over 9.8 per cent from the start of 2018 compared with Nifty50s 3 per cent rise. Also, BSE smallcap index dropped to its lowest level since October, 2017 on Tuesday. There are no reasons shares should be sold just because exchanges have imposed stringent rules.
Fundamentals should guide an investor, and not such a one-off event.
Event of the week
After over four years, RBI hiked interest rates by 25 bps which to a layman should be a negative for the market. But the market surprisingly rose, why? Because the rate hike was in the interest of our market to fend off any dollar exodus. The move was in tandem with the global monetary tightening policies adopted by our international peers and not motivated by domestic factors.
Had RBI not raised the interest rate, there could have been a currency attack, which is not in the interest of our country, where 80 per cent of crude oil requirements are imported.
For the first time, HDFC Banks fans were in for a rude shock witnessing dull activity from FPIs on the counter. This could be a new normal. It would be interesting to see how investors look at HDFC from a larger trend perspective given the uncertainties on how the banking world will be disrupted and who will take the lead in disrupting the business model.
The demand for HDFC Bank shares is indeed weak, which should worry domestic investors.
Technical Outlook
Nifty50 and Nifty MidCap indices both have different trade setups. While Nifty50 has limited upside potential, there is a good possibility that the Midcaps would still go higher. The risk-to-reward ratio is far better in midcap shares than in frontline shares. Stop losses for midcap shares are small and potential targets are higher, which offer better risk-to-reward ratios. Buy midcap shares on decline with current weekly lows as stop losses.
Expectations for the week
The domestic equity market can expect a lot of activity in the PSU banking space after the President signed an ordinance to finetune the insolvency law. The Finance Minister and heads of PSU banks have discussed constructive action plans. Any positive outcome on the recovery front should lead to a rerating of PSU banks.
Few banks like Indian Bank and Vijaya Bank, hopefully, should perform better, as their books are cleaner than their PSU peers. Additionally, markets are likely to take cues from global macros, as news flow on the domestic floe is almost over for now.
On the industry front, we believe pharma stocks have made a confirmed double bottom pattern on the charts and have started an upward journey. Investors with a long-term investment horizon can pick pharma stocks in their portfolios.
For the week, Nifty50 closed 0.66 per cent higher at 10,767.
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ET Markets
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