Dark Shadow Of Bond Yields Will Continue To Weigh On Equity

The rising bond yields continued to weigh on the equity markets world over last week and in the absence of any new trigger, will continue to impact the stocks in the coming week too. 

In spite of the rising bond yields had their long shadow on the markets, the Indian equities ended the week in green, with a gain in excess of 2 per cent, after two consecutive weekly losses. On Friday, Sensex and Nifty50 closed the week at 50,045 and 14,938.10 respectively, up by ~2.80 per cent each. The next trading week beginning Monday will be a truncated one, as the Indian bourse will remain closed for trading on Thursday, March 11, on account of Mahashivratri.

The rising bond yields have also led to the firming up of the US dollar against other major currencies like Euro and Yen. If the yields in the US continue to move up beyond 1.5 per cent and the US dollar also strengthens, then it can trigger the withdrawal of funds from risk assets like equities and riskier regions like emerging markets. 

Vinod Nair, Head of Research at Geojit Financial Services, said, “In the coming week, the market will be mainly focusing on the expectations on whether the Fed, in its upcoming meeting, will maintain its accommodative stance in a rising bond yield market. Additionally, Fed’s measures to maintain low-interest rate and high liquidity will also provide relief to the market sentiments."

In CY21, emerging markets like Taiwan and South Korea have seen an outflow of US$ 8 bn. However, India has received inflows of $5.5 billion till now in CY21 from foreign portfolio investors (FPIs). For the nine months ended December 2020, India has also received a net foreign direct investment (FDI) flow of US$ 40 billion, which is a 30 per cent increase over the corresponding period in FY20. India’s Forex reserves are at an all-time high of $584 billion, which covers our imports for 14 months. 

Despite such a strong fundamental position, the current valuation looks rich. Nifty is trading at a valuation of P/B of 4.3, which makes it vulnerable to a correction in case of global sell-off. 

Hemant Kanawala, Head – Equity, Kotak Mahindra Life Insurance Company, said, “Looking at the expected strong earnings trajectory over the next 2 years and stable macroeconomic conditions, investors should use such correction to increase exposure to equities”.

Even as experts are advising investors to adopt the buy at dip strategy, investors are in a confused state as to whether to buy the ‘growth’ stocks or to opt for ‘value’ stocks. 

Nirali Shah, who heads the Equity Research at Samco Securities has the answer. She said, in February, the MSCI World Value Index rose 4.5 per cent in contrast to a mere 0.3 per cent gain in the MSCI World Growth Index. Even back home, the commoditized stocks which had outperformed benchmark indices, only a handful number of times in the past for sustained periods, have started moving as deep value plays. Even a frequent laggard such as the Nifty Commodities index managed to surpass the benchmark index this week.

“Value stocks have definitely picked up momentum and going ahead, the value theme is expected to continue as our economy completely opens up in the second half of CY2021. The value celebration is expected to be accentuated by a faster rollout of vaccines, upbeat performance by Indian Inc. in Q4 because of a lower base and resumption of urban India. Investors are advised to look for value buys for their portfolio”, She opined. 

The week also witnessed changing investor preference from blue-chip stocks to small and mid-caps. with heavy action in the mid and small caps space. The Nifty Mid Cap 100 Index and BSE Small Cap Index gained 3.7 per cent and 4.1 per cent, respectively this week. Experts said, the change in investor preference from Blue chips to smaller stocks is also due to the rich valuation of Blue-chip stocks and also bargain hunting for quality small and Mid-cap stocks. There is no dearth of liquidity for quality stocks in the secondary market as well as in the primary market, they added.

Precisely because of this reason, the primary market remained in limelight with new shares of Heranba Industries listed at Rs 900, a premium of 44 per cent to the IPO price, while the subscription for the ongoing IPO of MTAR Technologies crossed 200x on the last day of application. The IPO season is in full swing with a dozen other primary market offerings expected in March, showing the excess liquidity in the system.

In the absence of any major domestic trigger Indian markets could take a cue from global developments and US markets, which have turned highly volatile.  The Nasdaq Composite Index has broken the 50-day moving average (DMA) decisively and could head towards the 200 DMA, which is at 11,500 against its current levels of ~12,723, which indicates a fall of another 1,223 points. 

The S&P 500 Index has also broken the 50 DMA. If the S&P 500 sustains below the 50 DMA then it can attempt to test the 200 DMA which is 8 per cent below current levels of 3,842. If it tests, its 200 DMA, it has the potential to go down by another 231 points. 

Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities said, “Nifty-50 could test the 50 DMA next week placed at 14,585 and if it breaks it then it can slide down to 13,000-13,600 range. The tone of the market seems to be on the downside for now.”