Indian Indices Trade Flat; IT Stocks Witness Selling

Fri, 9 Jun 11:30 am

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Share markets in India are presently trading marginally lower. Sectoral indices are trading on a mixed note with stocks in the IT sector and FMCG sector witnessing maximum selling pressure. Realty stocks are trading in the green.

The BSE Sensex is trading down 58 points (down 0.2%) and the NSE Nifty is trading down by 18 points (down 0.2%). The BSE Mid Cap index is trading down by 0.1%, while the BSE Small Cap index is trading up by 0.3%.

The rupee is trading at 64.26 to the US$. The rupee is witnessing buying interest of late.

The above appreciation in the rupee comes as a welcome breather for importers in India. Rupee appreciation helps importers to buy goods and services at a cheaper rate that earlier. This is vital for a developing economy that relies heavily on imports. So, this bodes well for the Indian economy as higher imports normally mean increased economic activity.

But on the other hand, the rise in rupee can spell trouble for exporters. The exporters are at a disadvantage owing to the currency appreciation as this renders their produce expensive in the international markets as compared to other competing nations whose currencies haven't appreciated on a similar scale. This tends to take away a part of the advantage from Indian companies, which they enjoy due to their cost competitiveness.

Nonetheless, a stronger rupee will pull down commodity prices. This will help in keeping a tab on the rising inflation.

While there are advantages as well as disadvantages of a rising rupee, one needs to understand whether the rise in the rupee is sustainable to derive any reasonable conclusion at this stage.

For one, the weakness of the US dollar is largely due to the relative unattractiveness of US assets. This is in part due to a very low interest rate regime prevalent in the US economy. Already there are indications that this low interest rate regime may not be sustainable for long. This means that US interest rates may go up and this may likely strengthen the US dollar.

To keep a tab on the movements in rupee and other currencies, you can read the stock market commentary from the Daily Profit Hunter team. Their commentary tracks the developments in the global economy as well as stock, currency and commodity markets.

In the news from global financial markets, the European Central Bank (ECB) kept interest rates unchanged in its monetary policy meet.

The decision comes as ECB President Mario Draghi and his fellow governing council members are yet to be convinced that the recent rebound in inflation in the eurozone is durable because wage growth remains sluggish.

What was remarkable was the bank did not mention the possibility of further interest rate cuts. This indicated that the ECB is aiming to end its ultra-easy monetary policy.

Meanwhile, the bank affirmed that the net asset purchases of 60 billion euros a month are intended to run until the end of December 2017, or beyond, if necessary.

The ECB has been pouring money into the eurozone to boost inflation from a near-deflationary level.

In our view, a big crisis is brewing within the eurozone. And this is going to have major consequences for the global financial markets.

While there are many positive developments taking place, the area's still a mess. First came the Grexit saga. Then there was Brexit. Now it's Italexit.

A recent issue of Vivek Kaul's Inner Circle (requires subscription) presents an intriguing insight on Italexit from our global team of experts in London and other major world centres.

Stocks in the Information Technology (IT) sector are witnessing selling pressure today.

Most of the brunt here is seen for Infosys. Shares of Infosys are witnessing selling pressure today on reports that the co-founders of the company are exploring a sale of their entire 12.75% stake in the company. As per the reports, the promoters were unhappy with the manner in which the company has been run since their exit three years ago.

The above fall in the IT sector comes after the IT index saw an uptrend this week. The BSE IT index gained around 2.6% on Tuesday.

One shall note that Trump's recent protectionist measures related to jobs in the US had threatened to disrupt the IT industry.

This is because large Indian IT companies, on an average generate more than 50% of their revenues from the US clients, as can be seen from the chart below.

Will Trump Mania Impact IT Companies Revenues from US?

But as my colleague Tanushree mentions in her 5-Minute WrapUp, the investor reaction to IT stocks were more out of perception than actual reality.

Though there is no doubt that there will be a fundamental change in the way business is done in the IT industry, it turns out that most of the IT firms were gearing up for this change already.

IT firms have started to adopt measures like hiring more locals in the US, getting more work done from India or other offshore locations, cutting down on low-margin clients, and stepping up automation.

All these measures will surely have an impact on profitability margins in the near term. However, in the long term, companies with niche product or service offerings will survive.

Most of the companies have started focusing on other markets and gradually reducing their dependence on US.

So as long as you aren't worried about the revenue guidance in the coming quarters, you need to do just one thing: Stay focused on valuations.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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