Overpriced Stocks May Attract Profit Booking

With the clarity emerging on the issue of tapering of bond-buying by the US Federal Reserve, which will begin by the end of the current calendar 2021 and interest rates in the USA rising only in 2023, the party in the domestic stock market is likely to continue for some more time.  The US Fed’s announcement at the Jackson Hole symposium and release of important economic indicator data next week will keep sentiments at Indian markets at elevated levels next week. Benchmark Nifty is expected to surge ahead further and scale new highs during the trading week beginning Monday.

After trading in a narrow range, in a confused state awaiting the US Fed’s announcement that came on Friday night, Nifty 50 ended Friday with a weekly gain of 1.55 per cent to 16,705.20. 

The Indian stock market has been outperformed by a broad margin among the emerging markets (EMs) category and its outperformance will continue going ahead due to a variety of reasons.  

The Indian markets are driven, at least for now, by retail investors, who have emerged as market movers and domestic institutional investors (DIIs) also are playing a supportive role. 

Dr. VK Vijayakumar, Chief Investment Strategist, Geojit financial services said, “We don't know how long this retail exuberance will last. Present valuations do not offer any margin of safety. Perhaps this is the reason why FPIs have been consistent sellers in the cash market for many days now. At the same time, they don't want to lose the momentum in the market since India is, by far, the outperformer in emerging markets”.

Foreign portfolio investment in August (up to 27th August) came in at a mere Rs 986 crore. This is inclusive of the investment in the primary market. If FPI investment in the primary market is excluded, the total FPI investment for August will be negative. Even though FPIs represent 'smart money' they are no longer market movers in India. 

Anyways, FPIs are unlikely to commit big fresh money at these stretched equity valuations. However, they have increased their exposure in the Indian debt market as the bond yield on Indian debt papers has risen from 6.10 per cent to 6.24 per cent recently. For them an Indian debt market provides a conducive environment for investment as US Bond yields are currently in the range of 1.10-1.20 per cent and the USD-INR exchange rate is also in their favour. It may be noted here that FPIs had considerably reduced their exposure in the Indian debt market last year when they invested more than $36 billion in Indian equities.

With the US Fed making a crystal clear announcement of the beginning of the tapering, it can be presumed locally that the rally is far from done. However, corrections on the way up cannot be ruled out. 

Samco Securities, in a research note, said, “The selling we observed recently in the broader market was not the ‘beginning of a crash,' rather a ‘healthy correction inside a larger bull market.' 

“Investors should accumulate quality businesses on dips. With the market creating new highs every week, this does not seem to be the last of the greens that we expect to see”, it said.

Vinod Nair, Head of Research, Geojit Financial Services opined that the market movement in the coming week will be influenced by release of key economic data. In the coming week, the market expects the release of key economic data such as Q1 GDP growth rate and Manufacturing & Service PMI. “The Q1 GDP is expected to show a sharp growth owing to a low base and recovery in economic activities towards the end of the quarter", Nair said.

While the threat of the pandemic in a third wave remains a potent disruptor, the intensity with which it can now strike is in doubt with the advance elaborate preparations already undertaken by most governments, said Joseph Thomas, Head of Research, Emkay Wealth Management.

Nifty50 closed on a positive note for the week but continued to trade within the previous week’s candle range. In the daily time frame, it has been making a series of spinning top and hanging man candlestick patterns which are signs of indecisiveness. 

“A mild dip towards short-term averages can be expected but the major bullish trend will be intact as long as Nifty trades above 16,250 levels. Any break below 16,360 support levels will signal weakness in the short term. Profit booking may occur in certain overpriced stocks, however investing in high-quality companies in stages would be a smart strategy,” Samco Securities research note said.