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Sensex, Nifty at fresh highs: Euphoria likely to continue but weak earnings show, systemic liquidity rollback could dent sentiment

01:08 PM Sep 24, 2021 | Sulekha Nair

The stock market indices soared to a new record level at the opening bell. The Sensex breached 60,000 in a runaway rally. The time taken for the last 10,000 points was much less (246 days vs the previous 10,000 points taking 609 days). The time taken for the Sensex to gain the last 5000 points was just 42 days (vs 204 days for the previous 5000 points).

Dhiraj Relli, MD & CEO, HDFC Securities, said, "This shows the impact of return of Foreign Portfolio Investors (FPIs) and local investors who continue to invest despite headwinds that cropped up time and again."

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The absence of a 10 percent correction in the indices over the last 18 months shows the maturity of the local investors but also throws up the possibility of that happening over the next few weeks/months, said Relli.

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Market buoyancy explained

The markets are buoyant as the economy has been opening up with almost all economic parameters reaching back to pre-pandemic levels, said Arun Malhotra, founding partner and portfolio manager at CapGrow Capital Advisors.

He said, "Revenge spending is happening in some of the segments, especially in leisure traveling and restaurants. The pace of vaccination coupled with less probability of a severe third wave of COVID and the start of a festive season in another 15 days are boosting the sentiments in the short-term."

Agreeing with Malhotra, Mohit Ralhan, Managing Partner & Chief Investment Officer of TIW Private Equity, said, "The bull run in the Indian market has continued to abate on the back of strengthening the economy and reduced expectations of any serious third wave of COVID-19."

Mohit Nigam, Head-PMS, Hem Securities said, the market indices have zoomed after investor sentiment got a boost from the US Federal Reserve’s dovish commentary. "In intra-day trade, the sensex crossed psychological 60,000 mark. Most global markets had shed gains last week amid concerns about potential risk spillover from Evergrande’s debt crunch and the outcome of the Fed meeting. However, investors once again increased their risky bets following some comfort on both these fronts."

The Chinese developer's statement that it had struck a deal on one imminent debt repayment comforted investors. The markets were also relieved by the Federal Reserve's tone indicating that it had kept the option of extending the stimulus. The improvement in economic activity and the optimism around the capex cycle revival has also boosted sentiments, Nigam added..

Caution advised

The indices are soaring but risks lurk, caution market analysts. The IPO frenzy and retail euphoria in small and mid-cap space are the most significant risks, pointed out Malhotra. "The US tapering, along with signs of commodity-led inflation, is one of the other risks. In the recent quarter, a disruption in logistics and shipping has seen non-availability of freight and higher costs in the form of higher freight costs that may bring some disappointment in few sectors. We may see lower revenues and hit to profitability that the market is ignoring," he said.

The massive rally in Sensex from March lows of last year, without any significant correction in between, has made some analysts cautious. “All previous bull markets in India - 1992-92, 1994, 1998-2000, 2003-07 - had big corrections of 5 percent, 10 percent, even 2 percent. But not now so far. But this will change and the market will correct, perhaps soon, since valuations are hard to justify," said Nigam.

However, risks of a faster rollback of systemic liquidity or a disappointment in corporate earnings warrant caution, said Nirav Karkera, Head of Research, Fisdom: digital wealth management platform. "Any shock in the form of materialisation of looming risks could snowball into a correction faster than expected. While the pace of reaction would be quick, the quantum remains unknown and correlated with the magnitude of the triggering event." Instead, Karkera said, now is the time for investors to review portfolios and align asset allocations with the targeted allocations.

IT, Pharma sector robust

Analysts were optimistic about financials, IT, domestic Ppharma, and select FMCG-related names. "IT demand scenario continues to be very robust, led by larger deal sizes. In the case of financials, the NPA cycle is behind us, and we will see profitable growth going forward, especially by larger private sector banks. In pharma, we have seen price erosion and USFDA issues coming again and would avoid names that have massive exposure to US and other regulated markets. We prefer companies dependent on domestic growth," said Malhotra.

The stocks ranking higher terms of outperformance will continue to shine, said Brijesh Bhatia- Senior Research Analyst at Equitymaster. "But traders and investors need to keep in mind the margin of safety in these stocks because their support levels are very deep," he said.

A dip of a couple of percent would be a good opportunity for traders and investors to enter, Karkera said. "We are witnessing broad based buying from largecaps to midcaps, and smallcaps."

Possibility of correction

Healthy corrections are essential to bringing sanity and rationalism back into the markets. The reasons are mostly unknown, whether the US tapering or the Chinese meltdown due to Evergrande, said Malhotra. "However, we see a robust earnings cycle going forward and the positive structural changes that will sustain the positive momentum. Any correction will be welcome and may be used as a buying opportunity in fundamentally good stocks," he said.

Shrikant Chouhan, Head of Equity Research (Retail), Kotak Securities Ltd, "Even at 60k our advice for investors is to buy in select stocks (strong companies in terms of managing and growing companies) with a medium to long term view. Most of the time markets have proved that the level of the index is just a number and the actual market index is very different from the numbers. However, the buying is advisable in tranches/parts. Do not lock your entire funds at current levels," he said.

Future outlook

The euphoria in the market is likely to continue. It may extend till January-February 2022. Though the volatility is likely to witness an uptick, said analysts.

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