A further fall will make markets healthy for fresh entry as Indian equities have been in the overbought zone for quite some time.
We maintain our stance to be cautious as Indian equities are running ahead of the fundamentals led by FPI liquidity and improved sentiments triggered by pent-up demand after the lockdown.
The on-ground economic reality is not so good both from consumer and corporates side except improvement in sentiments led by optimism owing to gradual opening of the economy. The rally in Indian equities has painted a very good picture which is not a reality, as it has started picking momentum from a standstill scenario. Our conviction on the same has been proved with rating agencies and the Reserve Bank of India forecasting a high negative GDP growth with recovery only in FY22 onwards.
Before the previous week's fall, buying was witnessed in some sectors on hopes that the festival season would be beneficial for some sectors. In addition, greenshoots like improved auto sales numbers, improved occupancy in airlines, normal monsoons and economic activity in some sectors returning to pre-COVID-19 levels were cheered by street participants. However, there are still supply-chain bottlenecks, availability of labour is also an issue that has resulted in lower capacity utilisation, working capital requirements have also stretched, forcing companies to look out for alternate revenue streams and various fund raising avenues.
An exponential rise in COVID-19 cases can take a toll on economic recovery. As the Indian economy has opened up partially and testing for COVID-19 stepped up, a sudden massive spike was expected. At present, the country is witnessing a high recovery rate and low fatality rate, which gives some relief.
Economic activity has picked up but the economic situation is still tough, which is evident from the way companies are looking to raise capital via QIP, rights issue, preferential allotment, debentures issue and FPOs to absorb the shock of COVID-19.
According to the data available with the market regulator Sebi, Indian companies raised Rs 1.1 lakh crore in August as compared to Rs 66,915 crore in July 2020 by way of issuing equity and debt securities to meet business expansion plans, loan repayments and working capital requirements.
The RBI's response to COVID-19 has been unprecedented. The measures taken by the central bank are aimed at the situation arising out of COVID and cannot be permanent. In the wake of the pandemic, RBI has stepped forward and has announced various liquidity, monetary, regulatory and supervisory measures in the form of interest rate cuts, higher structural and durable liquidity, a moratorium on debt servicing, asset classification standstill and recently a special resolution window within the Prudential Framework for Resolution of Stressed Assets.
There is a strong pipeline of IPOs. We believe there will be a mad rush for the upcoming IPOs after the stellar listing of IPOs that have come in COVID-19 era.
We are cautious on largecaps at present valuations as we believe they are running ahead of fundamentals led by high FPI liquidity and advise partial profit-booking. Earnings will take time to return to pre–COVID levels for sectors other than pharma, FMCG, specialty chemicals, e-commerce and IT. However, there is an opportunity in select midcaps and smallcaps for investors with a two-year horizon.
A further fall will make markets healthy for fresh entry as Indian equities have been in the overbought zone for quite some time. All eyes will be on Q2FY21 earnings, festival season sales, COVID-19 developments and the US elections.
(Akash Jain, Vice President - Equity Research at Ajcon Global Services.)Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.