Sailing on Smooth Waters

The April-June quarter turned out to be a fantastic one for Nifty as it jumped about 7 per cent, propelled by renewed confidence from the positive global cues, ramp up in vaccination, optimism over the prospect of additional fiscal stimulus post the second wave of the pandemic and unlocking in major states led by significant decline of corona virus cases. During this quarter, May alone contributed as much as 6.50 per cent. However, the month of April was a subdued month, where it lost close to 0.5 per cent amid the second wave that gripped the nation.

During the quarter, broader markets outperformed the benchmark indices with Nifty Mid-Cap and Small-Cap soaring nearly 14 per cent and 20 per cent, respectively. As a result, nearly 410 stocks from the Nifty 500 index were trading above the 50-DMA. Nifty 500 is a broad-based stock market index of the Indian markets. Despite this relentless incremental rise, the market is sending out several warning signs of overheating of the markets. The above data itself speaks about the overheating phenomenon as more than 80 per cent of the stocks from Nifty 500 traded above the 50-DMA.

Among the sectoral indices, during the quarter (Q2CY21), Nifty Metal, Nifty PSU Bank, and Nifty Pharma led from the front with Nifty Metal outperforming by a wide margin as it gained over 30 per cent. However, in the month of June, Nifty Metal faced volatility but it stayed within the range of the month of May and as a result, it formed an inside bar on a monthly scale. Nifty PSU Bank has gained 16.73 per cent during the quarter but it has been seen trading within the mother bar which was formed in the month of February 2021. The zone of 2,660-2,760 is an important resistance zone for Nifty PSU Bank.

A resolute breakout above this zone could ignite a fresh momentum in Nifty PSU Bank index. The Nifty Pharma index gained 16.59 per cent during the quarter. During the week, the much-anticipated stimulus package post the second wave was announced. Finance Minister Nirmala Sitharaman announced a loan guarantee scheme for pandemic-affected sectors worth Rs 1.1 lakh crore. This includes Rs 50,000 crore for ramping up health infrastructure in Tier II and III cities. A lot of thought seems to have gone into the announcement with a wide spectrum of population intended to get relief.

Furthermore, the impact of these announcements on the fiscal deficit is expected to be limited. After a strong run-up during the quarter, some profit booking is expected. Hence, going ahead, it is advisable for investors to look out for stock-specific opportunities. With sector rotation playing out in the market, we would advise to stay overweight in the Nifty FMCG and Nifty IT indices. Both the sectoral indices marked their fresh all-time high recently, but observation says that there is still steam left in these sectoral indices. On an YTD basis, Nifty FMCG is up by nearly 6 per cent and the ratio chart of Nifty FMCG to Nifty after testing its key levels has marked a higher bottom, which indicates it could witness uptick in the near term.

Furthermore, historically, the month of July is quite favourable for Nifty FMCG, as suggested by the data available since 2011. This data suggests that on an average Nifty FMCG has gained 2.5 per cent and in the last 10 years only twice has it closed in the red in the month of July. The outlook for majority of the consumer-facing industries which includes FMCG would be improved by a normal monsoon as predicted by the India Meteorological Department and Skymet. In the first three weeks of the monsoon (June 2-16), nearly 72 per cent meteorological divisions have had normal and above normal rainfall. Thus, if the monsoon continues to remain normal it would be quite a positive factor for the overall economy. Stay focused and stick to quality stocks!