MUMBAI: Domestic equity markets may continue to blink red next week as investors grapple with the rising probability of the US Federal Reserve tapering its enormous asset purchase program and surging Delta variant cases across the world.
This week, the benchmark indices ended in the red despite hitting their record highs earlier in the week. The losses in the benchmarks were mitigated to some extent by investors flocking to underperforming largecap stocks for portfolio protection.
At the same time, owners of broader market stocks continued to suffer as the Nifty Smallcap 100 index and Nifty Midcap 100 index fell 3.4 per cent and 1.7 per cent, respectively.
While much of the weakness in the market has been driven by excessive profit-booking by retail investors in small and midcap stocks as well as selling by foreign investors, the weakening global cues also played a part.
The suggestion from the minutes of the US Federal Reserve’s July meeting, released on Wednesday, was that the central bank was prepared for reducing the size of its $120-billion per month asset-buying program as the economy continues to strengthen.
The mere hints of withdrawal of liquidity sent global markets folding on Thursday and Friday as investors were concerned about the knock-on effects on asset valuations. Global equity markets are currently perched near their all-time high, barring China and Hong Kong, making them vulnerable to sudden fall.
Given those concerns, investor attention will shift to the beginning of the Jackson Hole Symposium that starts on August 26 where the US Fed could hint at the starting date for its tapering program.
“With cases of Delta variant rising globally and many countries implementing fresh lockdowns, this is becoming the biggest worry for the markets at the moment along with the nervousness around US Fed taper talks. Further, the economic slowdown and the regulatory clampdown in China too poses a risk,” said Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services.
In light of the waning risk appetite of investors, defensive bets in the market such as fast-moving consumer goods companies and information technology companies could become the safety boat for investors in the coming week.
This week, the Nifty FMCG index rose nearly 5 per cent to register its biggest weekly gains in nine months. The Nifty IT index, up 2 per cent, was the other major sectoral gainer of the week.
Investors owning shares of economy-facing sectors and high-beta sectors like metals and real estate are likely to suffer next week, as investor sentiment turns unfavourable. The 7 per cent decline in the Nifty Metal index this week is likely to worsen next week as global iron ore prices plummeted owing to rising demand concerns.
Technical charts did not provide happy reading for investors as the formation of the shooting star on Nifty50 chart suggests retracement to averages.
“There could be a dip (for Nifty50) to 16,150. We suggest traders maintain caution going forward and remain watchful of how the index reacts to the 16,150 level, as any break below the same might lead to weakness in the short term,” said brokerage firm Samco Securities in a note.
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