Weak data gives market the jitters

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BSE Realty index falls 5.22%, Capital Goods 2.65%

Weak data gives market the jitters
A large number of stocks fell as high July inflation dashed hopes of interest rate cut. On a day marked by high volatility, last-hour buying helped benchmark indices Sensex and Nifty close flat but beyond the blue chips, broader markets saw widespread selling.

Out of 3,010 scrips traded on BSE, 2,047 fell. Only 872 closed in the green.

Poor IIP data added fuel to the fire. July CPI inflation increased to 7.96 per cent as compared to 7.46 per cent month on month. Industrial production data for June was also lower than the market’s anticipation. IIP for June came in at a lower-than-expected 3.7 per cent as against the revised May 2014 level of 5 per cent.

Sensex managed to close flat with a gain of 38.18 points at 25,918.95, Nifty closed at 7,739.55, up 12.50 points. BSE Midcap and Smallcap indices fell by 1.71 per cent and 2.37 per cent.

Cyclicals like realty, capital goods and banks fell the most. Defensives like FMCG, IT and healthcare stocks emerged as safe havens.

BSE Realty index fell 5.22 per cent, with DLF down 3.98 per cent and Unitech by 17.14 per cent. BSE Capital Goods index fell 2.65 per cent also due to poor financial performance of BHEL in April-June quarter as it fell 6.57 per cent. Among banks, SBI fell 2.50 per cent and Axis Bank 2.04 per cent.

Amar Ambani, IIFL's head of research said, "Market participants turn-ed jittery as macro data was not really encouraging. Consumer inflation in July rose to a two-month high...It was a highly volatile session. The sudden bout of buying witnessed in the last hour of trade saw the indices closing in positive terrain."

Vikram Dhawan, director, Equentis Capital, a UK-based investment analytic and advisory company said, “High inflation data for July has pushed back expectations of a cut in the interest rate. Also, the result of some companies announced in last few days were not good like BHEL, Jammu & Kashmir Bank, Jaiprakash Associates, Tata Steel. A combination of both events led to fall in share price of a large number of companies.”

“The market is holding despite data not being very encouraging as there seems to be some confidence in the currency, unlike massive depreciation in the past, though globally view on US dollar is getting bullish,” Dhawan said.

“Currency is relatively calm and volatility is being contained, there is some profit taking but not a sell-off as foreign institutional investors at this point of time are not worried, as odds are not very high,” Dhawan added.

Foreign institutional investors were net buyers of equities worth Rs 718.27 crore; domestic institutions also bought equities worth Rs 22.03 crore.

Stocks of midcap and smallcap companies took a beating on Wednesday amid waning hopes of cut in policy rates anytime soon.

A total of 172 non-banking and non- financial midcap firms had paid interest outgo amounting to Rs 40,636 crore in FY14, up 12.5 per cent over FY13, data available with corporate data firm Capitaline showed.

It is seen that large companies with deep pockets generally fare better than midcap and smallcap firms in a tough economic scenario and hence their stocks are preferred over mid- and small-caps during such a phase. However, when the economy recovers, stocks of midcaps and smallcaps with scope of better earnings outdo largecaps.

The rally so far seen in the midcap and smallcap stocks, year-to-date, can be attributed to hopes of economy claiming back 6-7 per cent growth level. This has helped to narrow the valuation gap between midcap and largecap stocks.

In fact, the BSE midcap index is now quoting at higher valautions than that of Sensex.

Meanwhile, the 12-month forward earnings per share (EPS) estimate for BSE midcap index firm have fallen 3.81 per cent to Rs 554.61 over the past four weeks, in comparison with 1.3 per cent rise EPS estimates for Sensex.

“The midcap and smallcap firms have higher working capital-to-sales ratio. For these companies, interest outgo is a bigger problem than for largecap companies as the latter have access to cheaper loans via foreign borrowings. The recent results of midcap and smallcap companies also show the recovery process will take time. We see some correction in midcap counters in the short run,” said Ravi Shenoy, AVP, Midcap Research at Motilal Oswal Securities.

The BSE Midcap index (up 32.74 per cent) and the BSE Smallcap index (up 48.24 per cent) have outperformed Sensex (up 22.43 per cent) year-to-date. However, these indices have been underperforming Sensex since August 7.

Since the new government took charge on May 26, the BSE Midcap index has returned (4.90 per cent) in line with Sensex.

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