Confidence Returns, Albeit Slowly!
Buoyed by reports of the economy gradually finding its mojo, the drawdown of troops on the Indo- China border, hopes of a vaccine to beat corona virus and better-than-expected economic data from the US where the Institute for Supply Management reported its index of service sector companies increasing to 57.1 in June (marking the single-biggest increase since the survey was created in 1997), market participants are now being able to soften their anxieties regarding the rising number of virus-related cases in different part of worlds. As a result, the Indian markets propelled to a four-month high and the so-called fear index, the India VIX, hovered around the four-month low.
Bourses across the world were also seen buzzing and riding high as the tech-heavy equities logged fresh record high closing and China's Shanghai Composite jumped 15.61 per cent over the past eight trading sessions. The trading volume has also zoomed in China's Shanghai Composite, reaching a five-year high of 1.74 trillion Yuan, as recently announced in a report. Amidst this, China's watchdog, the China Securities Regulatory Commission (CSRC), has warned investors and traders about financial institutions that are illegally financing margin trading. This margin funding in the year 2015 had played a prime role in leading to a market collapse.
With interest in the secondary market swelling at a lighting speed, how could the primary market have stayed behind locked doors for too long? After a lull of almost four months, Rossari Biotech, a specialty chemical company launched its Rs 500 crore initial public offering (IPO). On the other hand, the recent data from AMFI indicates that investors' psyche is shifting from 'Mutual Sahi Hai' as the equity mutual fund schemes in June took a massive hit after net inflows tumbled to Rs 240 crore, recording their worst month in over four years even when the markets were on a song.
Amusingly, gold exchange-traded funds garnered higher flow of Rs 494 crore than equity schemes in June. The yellow metal has soared past its important psychological mark of USD 1,800 per ounce and this shows that investors' have expanded their search for safety. Going ahead, the focus of market participants would now shift on the earning season and as you would read this editorial, IT bellwether TCS would have come out with its Q1FY21 earnings. Q1FY21 has been almost a washout quarter for the full corporate sector with almost two months of complete lockdown to prevent the spread of the virus.
Taking this into consideration, the street would not be expecting any extraordinary results from India Inc. However, they would be all ears to the management commentaries and future guidance. The Nifty PE has reached 27.98 and this level is very near to the 2-standard deviation. In the past we have seen the PE reaching to 2-standard deviation mark which is usually a cool-off. Also, Nifty is close to its 200-DMA. Hence, we would advise traders to be a bit cautious about this movement and also we would warn not to take an overleverage position at this point of time.
Further, traders who have additional cash can hedge their positions and continue to carry their long positions. Because of what we have seen in the recent downfall in March 2020, when uncertainty grips markets at extremely stretched valuations, there is no time to think and hence be prepared to keep taking profit off the table as you never know which unknown factor could pull the carpet from under your feet! This brings to mind a quote from ace investor Warren Buffett: "Only when the tide goes out do you discover who's been swimming naked."
