Markets may fall further on FPI selling, 14,500 level crucial for Nifty

If 14,500 support levels for Nifty are breached, a dip till 13,250 is possible

Global markets have traded down on unfavourable macro developments. Along with high inflation and supply-chain risks across commodity groups and high-end items (semiconductors and active pharmaceutical ingredients), there are fears of global gross domestic product growth deceleration.

Central banks are tightening money supply and hiking interest rates. This has led to a risk-off attitude with foreign portfolio investors (FPIs) cutting exposure to emerging markets. FPIs have pulled out Rs 97,500 crore from rupee equities this financial year. The rupee has dropped to its lowest-ever levels versus the dollar.

The major market indices have dipped, with the Nifty down to 15,350 – a retraction of 18 per cent from its all-time highs in October 2021. Mid-caps and small-caps have lost even more ground than the Nifty and Nifty Next.  

Optimists believe India will be a growth outlier, given recovery in domestic demand, self-sufficiency in food, budgetary support for infrastructure, and strong balance sheets of many listed concerns which have delivered record profits and deleveraged.

Domestic investors have dipped into household savings and invested enough to absorb heavy FPI selling. There will also be a low-base effect boosting year-on-year (YoY) growth rates in the first quarter (Q1) of 2022-23, given the Covid second wave in Q1 of 2021-22 (FY22).

Pessimists see high inflation, weak rural and semi-urban demand, and rising trade deficit due to high energy prices. Balancing the latter, exports have remained strong. Overall, the fourth quarter (Q4) of FY22 results disappointed as the pace of profit growth slowed and revenue expectations were also not met. Aggressive monetary action by the Reserve Bank of India can be expected to continue and could further impact consumer demand.

Capital goods, entertainment (multiplexes), hospitality, and travel showed smart YoY growth on low bases in Q4FY22. Unlock trades in travel, hospitality, and entertainment could continue.

The monsoon will play a part in rural rebound if it picks up. Policy action like higher minimum support price and higher fertiliser subsidy will also help with rural demand. Infrastructure support should keep construction ticking, which, in turn, means that the domestic demand for cement, steel, and other construction materials will have support. However, cement may be overcrowded and metals will be influenced by falling global prices.

Market action is likely to be net-negative. FPI selling shows no signs of reversal and is driving downtrends.

Indices are trading well below the 200-day moving average, which implies a long-term bear market. The next line of support for the Nifty is 14,500. If that is broken, a dip till 13,000-13,250 is possible. On the upside, there is heavy resistance at 15,750-16,000.

There have been heavy sell-offs in metals, information technology (IT), energy and power, pharma, realty, and cement – these sectors have lost more ground than the market index. IT and pharma are seeing margin pressures. IT may see demand destruction, while pharma has supply issues. The metals cycle has issues on both supply and demand sides, but global demand is fast easing. In power and energy, fuel producers may do better than downstream utilities.  

Automotive and capital goods could be two areas of interest. If rural demand recovers, two-wheelers and tractors may rebound. Capital goods may be worth a look because corporate capital expenditure has been muted for the past three years. FMCG has lost comparatively less ground – again rural demand pick-up could make these stocks attractive.