IT, telecom, pharma and banks will be the sectors in focus with positive bias.
In September, the broad Indian equity market corrected by 10 percent. The key factor was that the economy needed additional support with fiscal sops which was getting delayed. In the US, the delay was due to the presidential election while the EU is waiting for the US election result and in India, the delay is due to the weakening fiscal strength. Other factors, too, deepened the negative trend such as the new cash margin system, Indo-China conflict, premium prices and shifting of funds from secondary to primary market due to attractive discounts provided in terms of valuation of IPOs, FPO, Rights and QIP.
After the correction, the market made a strong attempt to recover the losses. It overtook the last high quite easily in just two weeks. In India, it was triggered in anticipation of a fiscal stimulus expected to be announced before the start of the festival season. The global market also turned positive, mainly driven by the developments related to the presidential campaign and in anticipation of a big pre-election fiscal stimulus package.
To sustain the trend, a lot would depend on the size and effectiveness of the stimulus. In India, the initial estimate was low due to weak fiscal. There was a consensus that it could be about 2 percent of GDP. This estimate became larger fueled by the government and official statements reflecting a strong intention to push the economy forward but the desired fiscal package was not delivered.
The government provided sops to employees with cash vouchers and advance scheme and marginal additional spending on infra, which failed to cheer the market as it is unlikely to provide the required boost to the economy. Still, it is anticipated that these measures are not the end and more steps will be coming.
In the global market, hopes of a pre-election fiscal package in the US tumbled while EU plans to wait and assess the political stance post the US election. An intermediary cash benefit was announced in the US for individuals and for sectors heavily hit by COVID-19, which provided marginal relief but it was not a holistic big package. The delay can impact the market for a maximum two to three months. Whatever the outcome of the election, the government is working on a big plan.
In India, another setback was the adjournment of the Supreme Court verdict on moratorium, now expected to be on November 2. But the government has provided its views on undertaking all the burden of compounding effect of small borrowers and maintaining the financial stability of banks, which is positive.
Banking stocks are displaying a positive change-in-trend in expectation of a favourable judgment, ending the saga of moratorium that has affected the performance of the finance sector since the outbreak of the coronavirus package. A delay in the verdict is weighing on banks as well as the market in the near term since the financial sector accounts for the biggest portion of the market.
Another factor responsible for the bounce in the market was solid gains expected in Q2 earnings. The season has had a good start and buyback plans by IT companies have boosted the trend. The market is sceptical about the core economic sectors like industrial and metals and skewed positively towards digital-oriented sectors like IT and telecom and also pharma and chemical. Banks are also expected to do well due to growth in revenue, stable margins and a fall in moratorium and provisions.
The market had moved up in expectation of a big stimulus but the desired package was not announced in India, the US or Europe. At the same time, the pace of recovery is under stress because of the spike in COVID-19 infections that have brought back restrictions. The margin of safety is low given premium prices and a slowdown in the recovery.
The market may consolidate into a narrow-range in the near-term. The overall undercurrent of the market is still positive on a medium-term basis and a breakup is likely based on the continuity of positive Q2 results, more fiscal measures and developments in the global market.
Each and every correction is being capitalised as a buying opportunity. We were anticipating a correction in the rally, in the short term due to supreme prices and lack of economic and pandemic development.
A quick bounce in the market above the last high and near the pre-COVID level have brought volatility, which may stay for some time. For the Nifty5o strong support levels are 11,300 to 11,000 in the medium term, which limits the downside. The market will look forward with high hopes to Q2 results, an end to the moratorium saga and an update on the stimulus plan. IT, telecom, pharma and banks will be the sectors in focus with a positive bias.
(Vinod Nair, Head of Research at Geojit Financial 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.