The dream run of national stocks reached a new pinnacle on Tuesday when the Nifty50 index surpassed the 13,000 mark for the first time. Meanwhile, the S&P BSE Sensex topped the 44,500 mark in intraday deals.
A better-than-expected profit cocktail, better collection of goods and services tax (GST), better big data and progress in the development of the Covid-19 vaccine has pushed markets to their peaks, analysts say. That said, while markets appear to be primed for a sustained uptrend, investors may consider booking earnings gradually, analysts say.
What will drive the markets?
According to a monthly report by Edelweiss Mutual Fund, it is “risky to be underweight in Indian equities” at the moment, as the health crisis due to the Covid-19 pandemic is expected to weaken soon.
Four virus vaccines: one from Pfizer and one from BioNTech; AstraZeneca and Oxford; Sputnik V; and Moderna Inc – have shown an efficiency greater than 90%. Analysts say the development will trigger rallies in hit and cyclical stocks as the cycle of economic recovery begins.
Second, Edelweiss MF notes that the sharp 24 percent contraction recorded in the first quarter of fiscal 21 was the bottom the economy could have hit. A minor contraction between -5 and -10 percent will start the recovery process, and the GDP growth rate will turn positive for the third quarter of fiscal year 21.
This, in turn, will support earnings growth. Based on data compiled by Bloomberg, Nifty EPS (earnings per share) is expected to increase from 465 in fiscal year 20 to 677 in fiscal year 22, registering a growth of nearly 21 cents CAGR.
“After a long time, we have seen analysts revise published earnings estimates on an aggregate basis, as consensus earnings for fiscal 21/22 increased 9 percent / 4 percent. Discretionary private sector banks and NBFCs have seen maximum improvements as Nifty FY22 earnings are almost 18% below February’s peak, ”says Abhimanyu Sofat, head of research at IIFL Securities.
Furthermore, structural reforms in the agricultural and labor sectors, along with the Atmanirbhar scheme, initiated by the government to combat the crisis, will ensure a long-term sustainable growth rate, the report says.
Valuation
Given that benchmark indices have recovered 73.5 percent from their March 2020 lows, Motilal Oswal Financial Services says valuations are around their historical average. Based on their analysis, the 1-year Nifty P / B is trading at 2.8x compared to a 10-year average of 2.6x. Nifty RoE 1 year ahead, meanwhile, is at 13.4 percent versus the 13.8 percent average.
“Valuations for certain top-tier large-cap stocks are definitely very expensive. The rally had started with large-caps, but now even the larger markets are behaving. So, while the large caps look expensive, value falls in the middle. small cap segment, “says G Chokkalingam, founder and CEO of Equinomics Research.
Way ahead
Even when analysts expect markets to continue to trend upward due to surplus liquidity, negative triggers, which markets are not fixing, can lead to a sharp and sudden correction, they say.
Sofat of IIFL Securities is betting on a sustained uptrend, as investors explain the improvement in corporate earnings. Also, the falling dollar index suggests that markets may not turn down soon as the global allocation to emerging markets like India increases, he says.
So far in November, FIIs and FPIs have invested Rs 48,278 crore in the markets as of Monday, NSE data shows. This is the highest monthly income in almost two decades.
Chokkalingam, however, cautions that investors should increase their cash position by 20 to 30 percent, as any exit from FII will lead to a strong sell-off in the market.
“Investors who have high-value small-cap stocks can hold their positions, but otherwise investors should start to make a profit. In March, there was a net outflow of around Rs 10 billion prompting markets to correct. by 40%. So if these stretched valuations trigger a selloff by FIIs, the drop will be massive and investors won’t have a chance to participate, “he says.
Ambareesh Baliga, an independent market analyst, also advises investors to start recording profits, as partial locks still pose a threat. In addition, the sustainability of the recovery in demand after the holiday period must be followed, he says.
“The rally since March has been due to increased retail participation. These investors have yet to witness any pronounced correction. Therefore, no one can predict how they will behave when the market corrects. Therefore, as long as traders can continue By playing the markets, long-term investors should gradually start to profit, “he says.
“The overall sentiment is strong and the market outlook is positive going forward. If the inflows of foreign funds continue, we may see higher levels at Nifty in the coming days / weeks. Nifty could possibly touch levels of 13,200-13,400 as well. That being said, the upward movement is dependent on the sustainability of economic growth for the next few months after the holiday season. Therefore, at current market levels, it is advisable to partially record profits and have 15-20% cash in the portfolio. Any correction in the market can be used to distribute funds at lower levels, “suggests Hemang Jani, director of equity strategy, brokerage and distribution at Motilal Oswal Financial Services.
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