Equity markets are in dire need of Santa Claus and the cheer that he is known to bring every December — for the going is expected to get tough from here.
While a 25-basis-point hike in the Fed funds rate will not have a great impact on global liquidity, especially since other central banks such as the European Central Bank and Bank of Japan continue to pump in funds, continued hikes over 2016 could upset the apple-cart.
With the cost of borrowing in dollars set to move higher to 1.375 per cent by the end of 2016, all those who have used the dollar carry trade to buy assets will be affected. Immediate sell-off is unlikely but foreign portfolio flows into equity markets over the next year could remain edgy as investors re-consider their investments into emerging markets in general, including Indian markets. This can keep the lid on stock prices.
Foreign portfolio flows into India turned positive last week, but we need to keep a tight vigil on this number in the weeks to come. About a third of FPI’s assets currently originate from the US. Higher rates of interest in their home country will impact their decision on assets held elsewhere in the world.
That said, we stay with the view that Indian equity markets could be in the process of building a base at these levels. Even if benchmarks decline further, they could find a floor soon.
Corporate earnings growth has hit a nadir and is likely to only stabilise or improve from these levels, aided by rate cuts and lower input costs.
Since equity markets tend to react much ahead of the fundamental recovery, the downside could be limited.
This view is corroborated by the charts. There is an important support band between 7,300 and 7,500 for the Nifty 50 and around 24,000 for the Sensex. It is likely that the indices form a long-term low around these levels.
While volatility is likely in the months ahead, especially in January 2016, investors with a long-term horizon should use such dips to buy their favourite stocks.
With the FOMC meet out of the way, the focus is again turning towards the slowdown in China and the fall in crude prices.
The third quarter GDP numbers of the US will be an important factor deciding next week’s move.
Any sign of weakness will bring back doubts on the recovery there, giving stocks another pounding.
Let’s hope that the holiday season beginning next week brings some much-needed calm to markets as participants withdraw to celebrate Christmas and New Year.
Nifty 50 (7,761.9)
The Nifty managed a smart up-move in the first four sessions, partially helped by traders covering up their short-positions.
The week ahead: The Nifty followed our script pretty closely last week, making a low at 7,551 on Monday and peaking at 7,852 on Thursday.
The trouble is that the Nifty has reversed from a key short-term hurdle at 7,852. Fresh long positions are recommended only on a move above this. Subsequent targets are 7,950 and 8,041.
But if it is a volatile week, the index can fall to 7,670 or 7,551.
The short-term outlook will turn very weak on a close below 7,551.
The medium-term targets for the Nifty will then come into play. As mentioned last week, the next medium-term target below 7,500 is 7,350.
Investors have to watch for this level if the going gets rough in the final weeks of 2015.
Bank Nifty (16,594.3)
The Bank Nifty reversed from the low of 16,188 last week to end the week almost 251 points higher. But the decline on Friday portends further weakness ahead.
Watch out for the supports at 16,425 and 16,188, if the decline continues. If the index manages to move higher, there could be stiff resistance at 16,900. This level needs to be crossed before the index moves on to 17,118 and 17,332.
Most global indices closed in the green for the week, unfazed by the Fed’s move. The CBOE volatility index declined after hitting an intra-week high of 26.8 to close at 20.7.
The Dow was extremely volatile, rising to the high of 17,784 in the first three sessions only to give up all the gains in the last two sessions of the week.
Key medium-term support is at 17,000. Investors must worry only if the index goes on to close below this level. Subsequent targets are 16,684 and 16,377. But if the index manages to reverse above 17,000, it will mean a sideways move between 17,000 and 18,000 before the index moves on to the next level higher.