The positive market sentiment, as seen from the recent sharp rally, is likely to percolate into the broader markets this week.
“We could see a ripple effect, and the mid-caps and, maybe, even the small caps will start buzzing,” said S Ranganathan, head of research at LKP Securities.
Ranganathan sees the rally as a reversal in sentiment and not just a pullback. He feels the worst of the downtrend from the top - 62,000 in Sensex - is over.
“After so many months of selling (nine months, from October to June), we are seeing inflows from foreign investors since July. Local investors are pressing the accelerator, and in this scenario, when foreign investors stop selling and even if they put in small amounts, then the incremental impact on the markets is far higher,” he said in an interview to Moneycontrol.
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The positive sentiment is largely driven by the earnings companies have posted. “Earnings for Q1FY23 have by and large been good, and the street knows that these numbers were delivered despite there being a pressure on the margins and companies facing a lot of headwinds such as the semiconductor shortage,” he added.
Another factor contributing to this is the guidance that the managements are sharing in their post-results calls. “They have been very positive, barring those from a few sectors such as IT. Even sectors that have seen a sharp dip in their finished product prices, such as metals, have strengthened their balance sheet. Most of the metal companies that were laden with debt have repaid most of it because the last two years were a boom time for them. Now with metal prices correcting and favourable government’s policies, the users of these metals will start benefiting,” he said.
There has been profit-booking by the FIIs, especially in the IT stocks, but that has more to do with the ease with which they could execute these trades than performance of the companies, according to him.
“Many of the big IT companies such as TCS and large, mid-cap names such as LTI and Persistent have taken it on the chin when FII booked profits. But, they were selling because it was easy for them to take out money in Indian markets compared to other emerging markets. It has nothing to do with performance,” he said.
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The domestic investors have shown signs of maturity when the markets saw unabated FII meltdown. “The kind of FII selling we saw from January to June was unprecedented in the history of the Indian equity market and it was countered so well by the domestic investors, who were not redeeming. In fact, data suggests that SIP flows are strong, NFOs (new fund offers) which had stopped, have restarted over the last few days and even the smallest funds are getting money. All of these are good signs,” Ranganathan said.
While volatility will continue, the market is unlikely to see the kind of fall of 10,000 points unless there is an incremental bad news of that magnitude, he said.
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