Can Nifty sustain the rally in April and set a positive tone for FY24?

Since 2010, the Nifty has delivered positive returns in April seven times.

The BSE Sensex and the Nifty 50 gained 1.6 percent each on March 31, which marked the start of April F&O series. Heavyweight Reliance Industries propelled the stock markets higher.

As FY23 ends and a new financial year begins, can the Nifty rally in April and set the tone for the rest of the year? The data suggests otherwise.

Since 2010, the Nifty has delivered positive returns in April seven times, although the average gain stands at 1.6 percent. This includes the aberration in April 2020, when it gained over 14 percent as the stocks bounced back strongly after a 23 percent COVID-19 selloff in March. Excluding that, the average returns were a mere 0.5 percent.

That said, a short-covering rally is possible in April, analysts said. March rollover of Nifty stood at 74 percent, which was marginally lower than its quarterly average of 75.4 percent. On the options front in March expiry, the out of the money (OTM) 17,000 strike put option had highest open interest, followed by the deep OTM 16,500 strike put with 2,681,300 contracts.

“The market is oversold and this can lead to short-covering and a tactical rally in the near term,” said VK Vijayakumar, chief investment strategist at Geojit Financial Services. However, a sustained rally is unlikely since foreign institutional investors will again turn sellers at higher levels, he said. Furthermore, there are lesser number of trading days in April, with four weekday holidays.

FIIs have sold $3.35 billion in equities in 2023, even after turning buyers in March. According to Motilal Oswal, the April series has started with the lowest FII long-short ratio. The FII long-short ratio in index futures ranged from 7.75 percent to 26.03 percent in the March series and now it's near the lowest levels.

Also Read: IPO filings drop by over 50% in FY23 amid unfavourable market conditions

Expectations of blockbuster Q4 earnings are also not on the cards. Banks, which form the biggest part of the index, are staring at margin compression as loans get repriced faster. Revenue growth is set to be muted for Indian IT services companies as weak global macros weigh in. Clients are cutting discretionary spending and increasing focus on cost efficiency, said analysts.

The picture does not look too bright for the consumer sector as well.

“Broader demand in the FMCG sector remains in a similar trajectory as previous quarters. Rural markets are witnessing some green shoots of recovery. However, adverse weather conditions could be a roadblock to this recovery,” said Avinash Pathak, research analyst at LKP Securities.

Negatives priced in?

India has underperformed since end-October and the valuation premium to emerging markets has narrowed meaningfully. On the back of this, Morgan Stanley has upgraded India to equal-weight rating.

“We are bullish on India's structural growth outlook, driven by a digital infrastructure empowered lending boom, demographics, domestic demand and improving FDI,” it wrote in its latest strategy report.

However, valuation is still at a premium to the long-term historical average. The Nifty currently trades at a 12-month trailing PE of 20.16x, slightly higher than its long-term average of 20x.

Investor participation declined sharply in FY23 due to higher interest rates by global central banks to tackle inflation, geopolitical tension, and more recently, the failure of banks in the US. The combined average daily turnover in the equity cash segment of the BSE and the NSE stood at Rs 57,700 crore, a decline of 20.4 percent from the previous year, according to Bloomberg.

Domestically, the Adani saga dampened investor sentiment and many fund managers said the dust is yet to settle.

One breather for the equity markets could come if the Reserve Bank of India pauses interest rate hikes after one last 25 bps jump at its April 6 meeting, as per the consensus. But there are caveats here, too.

“The RBI could turn more data-dependent, keeping one eye firmly on domestic growth-inflation dynamics and another on any signs of contagion from a potential stress in the US banking system. In case of the latter, the RBI in our view will be nimble and proactive, if the need arises,” QuantEco Research said.

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