Better Safe Than Sorry
United Kingdom’s Medicines and Healthcare Products Regulatory Agency (MHRA) has finally given a green signal to the vaccine produced by Pfizer and BioNtech at record speed, thus leading to a global sigh of relief. This has had its impact. On the domestic shores the bulls were seen moving at a record speed, boosted by the continuous flow of funds from the foreign portfolio investors (FPIs). The fact that the Sensex moved from the 45,000 landmark to a milestone of 46,000 in just three trading sessions i.e. from Friday to the close of Wednesday is testimony of this brisk pace.
Further, the FPIs after a record flow of over Rs 65,000 crore in November continue to shovel money into Indian equities as month-till-date they have invested Rs 20,472 crore. During the last one week, surprisingly, Nifty PSU Bank, also known as the backbencher (underperforming sector), was seen outperforming sharply as all its stocks delivered positive returns. On a weekly basis, the index surged over 8 per cent with the underperformers leading the way. This indicates that market participants are joining the value hunters and looking for pockets which have underperformed to play the catch-up theme.
Nifty FMCG and Nifty Media also outperformed decently while Nifty Auto took a backseat as it underperformed the frontline indices. The RBI monetary policy was one of the key events during last week, quite on expected lines. The RBI governor’s assurance to continue with the ‘accommodative’ stance as long it is necessary has been deemed a good move, despite the surging inflation. It will help maintain continuity in the outlook. Commenting on inflation, the RBI sated it would remain elevated with some relief during the winter months.
In the Indian context, prices of all key commodities such as metals, energy, food, cement, textile, plastic, etc. along with communication, healthcare and education have seen strong inflation in the past six months. The commodity sector has been one of the top performing sectors in the domestic markets in the last two months. This can be gleaned from the fact that 93 per cent components of Nifty Commodities have delivered positive return since the beginning of October and 90 per cent of the stocks are trading above their 50 DMA.
Further, a large number of brokerage houses have raised their outlook for steel, cement, gas, chemical, etc. Many have stated that this is a sustainable and durable trend and ‘once in a decade’ opportunity to trade the inflation. However, a large part of the global inflation in the last three quarters or so could be attributed to supply disruption due to logistic constraints and weakness in USD. Hence, it’s important to check whether there is a sustainable pickup in demand in the coming quarters. If so, surely this could tip us off a major ‘inflation trade’.
The Nifty 50 index has gained nearly 80 per cent from the March lows and in the last 28 trading sessions it has registered gains of nearly 17 per cent with only a single day of any major corrective move. This vertical rise has resulted into the index deviating too much from its mean i.e. 24.78 per cent from the 200 DMA, which is very rare. Also, the price-to-book value (PBV) is at 3.83. After the global financial crisis, Nifty has reacted lower whenever it has attempted to reach a level close to 4. One more factor which needs to be closely monitored is the dollar index. With the sharp fall in this index we are seeing record flows from the FPIs. However, the dollar index has bounced off from its crucial support and any pullback in it can have a sharp impact on the flow of FPIs in Indian equity markets. Hence, it’s better to trade with strict stop losses as it’s better to be safe than sorry!
