Will January performance dictate trends in US and India? Yesha Shah of Samco Securities decodes

D-Street experienced wild swings and ended the week in the red as the participants baked in the possibility of a faster than expected US Fed rate hike given the soaring US inflation.

Globally, markets have been remained turbulent since the start of the year and this volatility was extended to this week as well.

Yesha Shah, Head of Equity Research, Samco Securities decodes how the action on D-Street in the week has gone by and what should investors watch out for in the coming week:

While January has historically been a month with positive returns for the US markets, the bears outpaced the bulls this time in 2022.

Interestingly, there is a belief that January's returns predict the performance of the US market for the remainder of the year, often known as 'As Goes January, So Goes The Year.'

In over a century, the S&P 500 has experienced this phenomenon about 75% of the time. If this were to materialize this year as well, it seems that bears will have the upper hand, based on January's performance.

When tested on Indian markets, it was observed that it occurred nearly 90% of the time from 1992 to 2002. However, in the past decade, the frequency of its occurrence has plummeted to 40%.

This drop can be traced mostly to the fact that, given our economy's robust foundation, the Indian market's reliance on and correlation with global markets has been dwindling.

Furthermore, with increased participation from DII and retail investors, India's reliance on foreign flows also has been reducing.

In fact, FIIs liquidated equities worth Rs 33,303 crore in January, marking their highest selloff since the onset of the pandemic.

Despite this, the Indian market remained sturdy, with the Nifty50 sliding by a mere 0.08% in January, compared to an over 5% dip in S&P 500.

Though this indicates that the subservience of the market to global peers has shrunk, it is important to remember the fact that it is still somewhat vulnerable to global events.

As a result, investors should continue to march with caution and make sound investment choices considering the current global narrative.

Event of the week:

The RBI has avoided joining the choir yet again by taking an unexpected dovish stance. The central bank maintained an accommodative stance, leaving policy rates unchanged and emphasising the significance of broad-based economic recovery.

Furthermore, the RBI tends to believe that inflation is transitory, as seen by its lower-than-expected inflation predictions for FY23. Given the backdrop of growing crude oil and commodities prices, this goes opposed to the global trend and raises a few worries.

With global central banks quite vocal that they want to begin tightening policy, the RBI's lack of guidance on this front leaves the Indian market vulnerable to the Fed's move in March.

The policy, on the other hand, boosted the bond market, with the 10-year G-Sec yield returning to pre-budget levels.

From the standpoint of the equity market, the unchanged reverse repo rate speaks well for the credit cycle, which has just recently begun to grow, helping banks, NBFCs, HFCs, and real estate firms.

Technical Outlook:

The Nifty50 closed the week on a negative note and continued to consolidate in a narrow range. In line with past few weeks, this week as well the index faced strong resistance and failed to sustain above its 20 DMA and is now contained in a range of 17,050 to 17,800.

A decisive break from this range is likely to set the next course of action going ahead. Most of the global indices are also exhibiting a bearish undertone.

We, therefore, suggest traders maintain a neutral outlook and create new longs only on dips or around immediate support levels.

Expectations for the week:

After the reaction to US’s hot inflation, investors globally will be focused on gaining a clearer understanding of the Fed's action, as the minutes of the most recent FOMC meeting is set to be released.

Another significant metric to watch will be China's inflation data, which has recently shown indications of easing. Back home, with the RBI downplaying inflation and rising crude and commodity price overhangs, D-Street investors will be keeping a close eye on the domestic inflation rate to predict its future path.

Given these events, markets are largely expected to remain volatile and range-bound. Amid elevated volatility, investors should sit tight on to their quality investments and avoid aggressive bets until a clear direction is established. The Nifty50 closed the week at 17,374.75, down by 0.81%.

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)