‘Optimism’ and ‘Expectations’ are the two major pillars of the stock market. The hope of faster than expected recovery in the economy based on the positive development on the vaccine front has helped the Indian markets to post fifth consecutive weekly gains on Friday last.
Indian measures closed with a gain of 2.1 per cent every week with Nifty settling at 13,259 points while the Sensex crossed record 45K-mark to close at 45,080 level. In the wake of no major event listed during the week beginning Monday, Indian market is expected to add further gains on the back of fund flows.
As compared to November 27 closing, Nifty is up by 290 points while Sensex is up by 930 points. Since November 4, Nifty has gained 1,350 points (11.34 per cent) while BSE Sensex has added over 4,464 points (10.11 per cent).
The momentum seen in the recent past on the back of inflows from FPIs is expected to continue as indications of the US dollar remaining are strong. This will help foreign flows into emerging markets including India to continue. This should be positive for the emerging markets.
After witnessing record inflows of Rs 60,358 crore in November, FPIs have invested in Indian equities to the tune of around Rs 1.10 lakh crore (roughly US$ 17 billion) in CY20. In the first four trading sessions of December (till 4th), FPIs have invested Rs 16,520 crore.
During the past week, large-cap stocks faced profit booking and witnessed the selling pressure from the domestic institutions, whereas small and midcaps were lapped up by retail investors. Broader indices namely mid and small-caps too were seen adding 2-4 per cent each week for the fifth week in a row.
The rally seen in the recent past is broadening as smaller counterparts of the industrial sectors are catching up with the industry stalwarts. The development on the vaccine front has played a significant role in this catching up of rally in the small and midcap companies. Along with the stocks rising across the globe, the commodity prices – metals and crude oil--are also on the rise. Hopes of a faster than expected demand recovery also led global crude prices to nearly touch their 9-month highs.
The Reserve Bank of India (RBI) maintained its status quo stance for the third consecutive monetary policy and revised GDP numbers upwards in line with expectations of the Monetary Policy Committee (MPC) meeting held last week. Even the MPC has acknowledged the rising inflationary tendencies but no efforts seem to have been made in that direction. Inflation could remain elevated going forward, given that import restrictions are in place to support our economy and this growth recipe could have unintended consequences of higher inflation, which will be a bigger problem.
This could be cause of concern for the Indian market. The prices of petroleum products are already ruling at the highest levels. The rate of petrol has crossed the level of Rs 90 per litre in Mumbai. Diesel rates are not far behind. India’s retail inflation has already crossed 10 per cent. Though it is expected to come down in coming days as supply restrictions ease. However, the current rate is much higher than MPC’s target range of 4-6 per cent. Rising crude oil prices in the international market could pose a serious threat in the coming days.
Though RBI gave priority to growth as compared to containing inflation and kept interest rates unchanged, a rising inflationary pressure may force the central bank to change its stand.
Hemant Kanawala, Head-Equity Kotak Mahindra Life Insurance Co. said, “Consumer price index (CPI), that is retail inflation, hovers at higher than the mandate given to MPC remains a key risk to easy monetary policy stand adopted by the central bank”.
During the week gone by, the dominating sectors like banking and financials were replaced by metals, auto, pharma and IT. The short-term trend continues to remain bullish.
However, Nirali Shah, Senior Analyst, Samco Securities said, “Technically, Nifty index is trading at rising channel resistance on the weekly chart, hence, traders are advised not to trade highly leveraged or aggressive bets. As, a mild dip can trigger a profit booking and a break below 12,900 for Nifty, can be taken as a warning signal for any short-term decline.”
The firm trend in the market is now also backed by the decent earnings posted by the India Inc., improving data on economy and covid containment as well as an accommodative monetary policy.
There was strong performance by the corporate India in the quarter ended September ‘20 with Nifty 50 companies showing profit growth of 16 per cent on the back of better than expected sales growth and tight cost management. There are expectations of earnings growth of around 10 per cent in FY21 and more than 25 per cent in FY22.
Kanawala said, “Nifty P/B has moved to 3.7, which is close to pre-Covid levels on January 20. It implies that equity returns from here onwards will come from earnings delivery rather than valuation rerating”.
As mentioned above, the banking sector shares may witness slowdown but those shares from the sector, like Public Sector Bank (PSB) stocks still have the potential to outperform their private sector counterpart, as they haven’t still participated in the banking sector stocks rally.
Vinod Nair, Head of Research, Geojit Financial Services said, “PSB stocks are still much cheaper than private bank stocks. In the last three months, private bank stocks have gained over 30 per cent, while PSB stocks have not gained even 50 per cent of their private sector counterpart. On valuation basis, Price to Book Value (P/BV) of PSBs is at 0.4x compared to 2x multiple of Nifty Bank index.”
Market has also witnessed a shift in investor preference to broader markets led by rallies in mid and small cap stocks, Nair added.
Satish Kumar, Research Analyst at Choice Broking said, “Further updates on vaccine developments and revised discussions regarding US stimulus can inject more optimism into the global markets. Apart from this, investors should keep a close watch on the coronavirus situation”.
Events of the next week
Domestic manufacturing data is to be released next week, which can show marginal growth, improving the market outlook for the sector. Other key events for the next week are US inflation and initial jobless data, European Central Bank (ECB) President speech and its decision on interest rate and Bank of England (BOE) financial stability report will also be keenly watched.
The banking sector is likely to continue to stay in focus in the coming week as the Supreme Court (SC) may pass its verdict on moratorium. This may be a trigger for PSB stocks.