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Global risk-on is the next trigger for the domestic market

Given mismatch in financial figures, the market will reflect premium valuation during the pandemic period till economy & growth rate stabilise.

May 30, 2021 / 08:37 AM IST

RBI's warning of the risk of a bubble in the equity market in its annual report made the market cautious, in between. RBI has been mentioning about a disconnect between the market and real economy since 2020. As we know this diversion is due to COVID. The actual real economy is dull while the equity market is valued based on its future earnings growth based on an ongoing concern basis. The undertone of the long-term economy is solid and the extra liquidity has supported the market with fiscal & monetary gains. Some sectors have also benefited from pandemic.

The policy is expected to maintain its prejudice reaffirmed by the RBI & government in recent announcements. This liquidity support is expected till the economy stabilises, post that a calibrated reduction in easy money policy is expected. This change will be negative for the market only for a short to medium-term basis while long-term economy & market trend & policy should continue.

Regarding high valuations, the method used by RBI would be based on historical trends which will show high figures given the low real economy today, it shouldn't be very relevant. If, we value based on future earnings that too is on the higher side and will certainly impact the performance of the market on a short to medium-term basis.

Industries which are at high valuations are IT, Pharma, Chemicals and FMCG, but we should also consider that they have a good outlook limiting the setbacks and increasing validity to trade at premium levels. Cyclicals like Metals are too at high valuations with a mixed outlook and expected to trade weak. Broadly, Mid & Small caps are also at expensive levels with mixed pockets of high & low valuations. Given mismatch in financial figures, the market will reflect premium valuation during the pandemic period till economy & growth rate stabilise.