Any signs of tepid response in capital raising could lead to fractures in the newly-begun PSU rally
The momentum seen in the Indian equity market is expected to continue for the eighth consecutive week. Nifty50 closed the week at 13,760.5, up by 1.8 per cent. During these seven weeks, from October 23 closing of 11,930.35, Nifty has added 1,830.20 points and has gained 15.34 per cent. Although small and mid-cap stocks had outperformed the benchmark indices during the week, a reverse trend was witnessed by the end of the week.
Market participants are expected to adopt a cautious approach as the next trading week is going to be a truncated one (only four trading sessions) due to the Christmas holiday on Friday, December 25. One cannot rule out mild profit booking on the way up, the dealer said.
The week that was ….
Shrikant Chouhan, Executive Vice President, Equity Technical Research, Kotak Securities said, “In the current week the market has continued its gradual run-up. Financials failed to perform. But Technology and Pharmaceutical stocks performed much better than expectations and that has helped the market to close above the levels of 13,740”.
The larger texture of the market is still on the bullish side, so any short-term corrections should be used to add quality IT, Pharma, and FMCG stocks with the medium-term time horizon., Chouhan added.
IT and pharma were top performing sectors for the week, while gains in the banking index remained checked due to consolidation in HDFC Bank and ICICI Bank, said Satish Kumar, research analyst at Choice Broking. Auto index underperformed the market for the second consecutive week amid concerns over raw materials supply issues.
Primarily there are three major factors that are driving the domestic stock markets. The first one is higher volatility in the Dollar index. As the US dollar index reached two years low-level last week at $90, currencies of other emerging markets emerged stronger. The second important factor is the falling inflation rate in the domestic market. India’s retail inflation growth was muted in November at 6.93 per cent in November from 7.61 per cent in October, resulting in rising in purchasing power, if the trend continues.
The significant improvement was seen in the corporate earnings in Q2 and expected revival further ahead in Q3, the results for which will start flowing in from January 10 is also driving the rally.
Most of the economic indicators show improvement. The index of industrial production (IIP, factory output) growth of 3.6 per cent in October ‘20, manufacturing sector purchasing managers’ index (PMI) in the expansionary zone at 56.3 in November ‘20, and sustained traction in the consumption demand are stoking the rally. The factors contributing to the economic growth are normalization of the lockdown impact, multiplier impact of the stimulus, and recovery in global trade.
From the current commentary of most central bankers, the accommodative policy is likely to continue till they observe stability in economic growth and employment.
In addition to this, the expectation of two major global developments fructifying in the near future helped the world market rally to continue. These two events are hopes of a post-Brexit deal and the US government approving a $900 billion stimulus package. The approval of the stimulus package will directly put money into the citizen’s pocket. These factors taken into account together hints at a bull run to get strength. However, there will be some sessions that can encounter profit booking in the remaining part of the year.
The deluge of liquidity is spreading to other asset classes too. It is not only equities but other assets too, are witnessing quite an up-move. Metals and crude oil have witnessed a firm trend in prices, whereas the digital currency Bitcoin moved in tandem with the benchmark indices to scale a new high of $20,000 levels.
Foreign Portfolio Investors (FPIs) have invested $14 billion since November to date and $21 billion in CY2020. India has received much larger flows this year as many other emerging markets like Taiwan, South Korea, and Thailand have seen large outflows.
Hemant Kanawala, Head – Equity, Kotak Mahindra Life Insurance Co. said, “As the US dollar is expected to remain weak, FII flows in emerging markets and India are expected to continue and remain strong”.
Any sudden negative news be it the (in)-efficacy of vaccine or trade concerns between countries could lead to a correction.
In a piece of advice, Nirali Shah, senior research analyst with Samco Securities asked investors to adopt buy on dip strategy gradually in the wake of a lot of optimism prevailing in the market from 2021.
Events of the week
The big bang listing of Berger King’s shares on bourses offered in recently concluded IPO and back to back upper circuit for two days was the highlight of the week. The subscription level in the IPO is also surprising in the market. The IPO of Mrs Bector Food Speciality that followed the Burger King listing also received an overwhelming response from the investors.
The US Federal Reserve chairman categorically mentioned during the FOMC meeting held during the past week that the support to the market in terms of low-interest rates will continue till the twin objects of economic recovery and full employment is achieved.
With major economies pumping in billions of dollars into the economy, Japan too announced another stimulus package for its economy to the tune of $708 billion.
Based on these developments, Shah said, “It can be reasonably concluded that the optimism in the stock markets is here to stay and only a significant catastrophe can make a dent in the rally”.
The current Covid situation in India gives the government room to open the economy further. In that direction, centre took a major decision when the cabinet cleared the auction of 4G airwaves worth Rs3.9 lakh crore in March 2021.
Market technicals
During the week, the advance-decline ratio remained favourable with more number of stocks advancing compared to declining. However, some of the large-cap like Reliance Industries Ltd (RIL) and the banking sector broadly remained muted.
Cautioning the traders, Shah said, “We maintain our bullish stance and suggest to avoid creating long positions as valuations look stretched in the short term. It will be advisable not to create fresh long positions at this level.”
Upward Rising Channel formation since the last several days which shows an upside movement in Nifty, along with consistently trading above its 21 Days Moving Average. Apart from this, movement in major large-cap stocks on charts indicate very good moves further, during upcoming trading sessions. A daily momentum indicator relative strength index (RSI) reading is at 81 levels with a positive crossover also points out for a positive breath in the index.
Sumeet Bagadia, Executive Director, Choice Broking, said, “At the present level, Nifty has strong support at 13,450 while upside resistance comes at 13,915”.
Expectations for the week
As regards PSU Banks, any signs of tepid response in capital raising could lead to fractures in the newly-begun PSU rally.
As most of the parameters are looking favourable, investors must pay attention to valuation. Nifty is trading at a P/B of 3.9, which is close to an all-time high since 2009. What it means that there is limited upside from valuation rerating and a lot of positive scenarios is already priced into it. The consensus is estimating high double-digit growth in earnings in FY22 and FY23.
Kanawala said, Corporate earnings to be announced in January will give some indication in this regard, if this is achievable. It may be advisable to add equities on correction to improve risk-return equation, he said.
Events in the forthcoming week
Key major events for the next week include Bank of Japan monetary policy meeting minutes, US personal income/spending data and US new home sales data. Besides, investors should keep a close eye on Covid vaccination in developed countries, US stimulus updates and Brexit trade deals.
Vinod Nair, Head of Research, Geojit Financial Services said global events will play a crucial role in the next week.
“Decision on the US stimulus package and Brexit deal can be expected in the coming days. RBI will be releasing deposit and borrowing data of the Indian banking system for the month of November. Growth in business figures is expected and it will have a significant say in the forming of banking sector outlook, for the coming quarters, "Nair said.