Is the Bullish Narrative ‘Priced In?
The indicators of economic growth during Q2FY21, namely, consumption, investment, exports and financial indicators, etc. for the month of October were announced last week. The data has been welcomed with open arms. The general consensus is that the growth is “surprising”, and that the recovery is much quicker and superior than previously estimated. This has been in line with our expectations, as had been mentioned in our last week’s editorial when we had stated that the GDP data for Q2FY21 is going to surprise the street and it will be followed by a series of upgrades.
This is what exactly happened a day after release of GDP data. Nomura Holdings upped the country’s GDP forecast to -7.1 per cent from -9 per cent earlier. The buoyant data, further boosted by news about UK granting approval to the corona virus vaccine developed by Pfizer and BioNTech kept the momentum in the stock market as the Nifty touched the level of 13,200 for the first time ever in history.
The incoming data definitely looks cheerful and the revival process indicates a V-shaped recovery but most of the data is being viewed based on consensus estimates benchmark; it is important to take note of the other side of the story that the base effect is leading to a positive surprise on some of the numbers. It is pertinent to note the data with the usual YoY comparison. The combined index of eight core industries came in at 124.2 in October 2020, which resulted into a contraction of 2.5 per cent compared to the same month of the previous year.
As a result, it has been eight contractions so far this year. Cumulatively, during the April-October 2020, the index saw a contraction of 13 per cent as compared to a growth of 0.3 per cent in the same period of previous year. Meanwhile, India exports faltered back into the negative territory in October after growth in September. Exports declined 5.12 per cent YoY in October. The major concern is that India has trailed its peers materially in export growth in the past several months. Comparative data of export growth on a three-month moving average basis showed that Vietnam, China and Taiwan have seen the strongest revival, followed by Bangladesh. India and Indonesia have lagged behind.
Given the ongoing extremes of the market on the back of record inflow from the FIIs, the imbalance for now suggests protecting profits by raising stops. However, with this it doesn’t mean we are outright bearish on the markets; our stance is that a retracement is the need of the hour as a healthy correction would make the market a good proposition to enter for those who have been watching from the sidelines. As always, smart investors and traders prefer to enter new positions where their risk is well-defined and the risk-reward is skewed in their favour, which the current scenario doesn’t seem to offer.
There’s a time to press the buy button and then there is a time to be patient like a crocodile waiting for its prey. Now is the time to be patient. The technical data too suggests that a breather is important as the Nifty is trading 21.97 per cent above the long-term moving average of 200 DMA, which is a rare phenomenon. And at the same time, the momentum is seen to be diverging. Going ahead, all eyes would be on the outcome of the RBI policy. The street consensus is that the RBI is likely to keep interest rates unchanged. We also moot this idea as the retail inflation for the month of October has surged to its highest level in the past six years and is way above the upper range of RBI’s level of 2-6 per cent. Overall, our view for the week suggests that a consolidation is likely for the headline indices. That said, stock-specific action should command attention.
