Investors, Be Cautious In Near-Term!
Diwali celebrations seem to have begun on D-Street almost a month ahead of the schedule festival as the Indian markets extended their winning streak for the 10th straight session on Wednesday. And with this astonishing upward movement the record books have been rewritten as this is a record of sorts in the last few years. The rally is majorly driven by stocks from the banking and IT sectors. This is quite evident from the fact that only 44 per cent of the stocks that constitute the Nifty 50 index have given positive returns from last Thursday’s closing to Wednesday. The flag-bearer in the last week has been Bank Nifty and this is clear from the fact that 83 per cent of the stocks that constitute Bank Nifty have delivered positive returns in the same time frame.
As of Wednesday’s closing, the dominance of D-Street bulls has been with such great authority that Indian benchmark indices have not only outperformed their emerging market (EM) counterparts, but also all the three major US stock market indices. This outperformance by the Indian benchmark indices has been posted despite the fact that the IMF slashed India’s economic growth forecast further by 10.3 per cent from the earlier 4.5 per cent in FY21. On the other hand, IMF expects the world economy to fall less severely by 4.4 per cent as against 5.2 per cent it projected earlier in 2020.
So what is the reason behind the markets scaling upwards? To begin with, buying interest in the sectors which hold high weightage in indices like banking and IT have helped them to stand firm and secondly, it is the inflow of funds from the FIIs who have been net buyers of Rs 3,208.15 crore since last Thursday to Wednesday. The other reasons include the hope that the unlock measures will revive growth, not to forget the flattening of the active virus cases across the country. Also on the positive side is a statement by RBI Governor Shaktikanta Das, stating that “barring the incidence of a second wave, India stands poised to shrug off the deathly grip of the virus and renew its tryst with its pre-pandemic growth trajectory.”
The earning season has further ignited the enthusiasm of the market participants as the IT sector has set the tone. Amidst the pandemic-induced challenges, Infosys’ Q2FY21 performance has been ahead of expectations. The company reported a jump of 14.4 per cent in its net profit on a sequential basis and a growth of 20.5 per cent on YoY basis. Further, buoyed by the strong order book, the company revised its revenue growth guidance upwards to 2-3 per cent in constant currency for 2020-21. In the coming days, the results would start to trickle in from the most talked sector i.e. banking. HDFC Bank, the leader of the banking pack, is scheduled to announce its earnings on Saturday.
It has gained almost 8.40 per cent since the start of the month and market participants would watch out for the earnings with bated breath. In fact, the banking stocks were emerging out of a massive clean-up drive and had slowly started to come under some sort of control when the pandemic took over and investors once again started to shun these stocks as they expected the banks to come under pressure with NPAs and delayed loan repayments. So if there is any pleasant surprise by the blue-eyed boy of the banking sector i.e. HDFC Bank, it would help the bulls to revive.
Talking about the valuations, the market isn’t cheap anymore on a PE basis. However, it is still reasonable on other parameters such as PBV. Considering a promising start to the Q2 earning season and expectation of a healthy demand revival in the festive season, the markets are likely to remain buoyant but at the same time a lack of participation from the broader indices and tentativeness in global markets is a big concern. Hence, caution is warranted in the near term for investors.
