The optimism seen in last 10 months has not only taken the benchmark indices much ahead of their previous record high levels seen in January 2020, but has made the market overvalued. The up move is largely attributed to FII money as central banks across the globe pumped in trillions of dollars in stimulus.
The market had seen a lot of pessimism amid COVID-19 crisis and lockdown. The benchmark indices fell in first half of 2020 about 40 percent each from their record high levels of January 2020.
The benchmarks gained more than 16 percent from Republic Day 2020 to Republic Day 2021, with the BSE Sensex crossing the psychological 50,000 mark. The broader markets outperformed frontliners with the BSE Midcap index gaining over 17 percent and Smallcap rising 22.7 percent.
"Markets are barometers of the economy with a potential to discount the future. If this is true, the Indian economy is on a strong recovery path. If the recovery in growth and corporate earnings, currently underway in India, gathers momentum, the markets may further surprise on the upside," VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services told Moneycontrol.
"But it is important to appreciate that the market is overvalued from the short-term perspective. At high levels, the market is vulnerable to a correction. Investors can utilise the current euphoria to get rid of low-grade stocks from the portfolio," he said.
Auto, Capital Goods, Healthcare, Information Technology and Metals were in the leading position, but PSU banks and oil & gas underperformed in the last one year period.
About 300 stocks out of BSE500 index closed in the green in one year period from last Republic Day, of which top 27 stocks have given triple digit returns (100-800 percent) including Tanla Platforms, Adani Green Energy, Aarti Drugs, Laurus Labs, Birlasoft, IndiaMART InterMESH, Dixon Technologies, Tata Elxsi, Affle India, Navin Fluorine International, Tata Communications, Adani Enterprises, Persistent Systems and JB Chemicals.
The next 50 stocks in the BSE500 index rallied in the range of 50-99 percent which included Bajaj Electricals, Aurobindo Pharma, L&T Infotech, Mindtree, Syngene International, Divis Laboratories, Cipla, Havells India, Wipro, JK Tyre, Escorts, Infosys, Dr Reddy's Laboratories, Ipca Laboratories, HCL Technologies, Muthoot Finance, Tata Chemicals and Tata Consultancy Services.
On the other side, Future Retail, Future Consumer, Raymond, Chalet Hotels, Punjab National Bank, Union Bank of India, Jagran Prakashan, Canara Bank, Indiabulls Housing Finance, Century Textiles, DCB Bank, Bandhan Bank, IndusInd Bank, RBL Bank, Coal India, IIFL Finance and Edelweiss Financial Services corrected 30-75 percent from last Republic Day.
Foreign institutional investors poured in Rs 1.73 lakh crore in Indian equities in last one year. In fact the flow was highest amongst emerging markets as the initial fear of India could be more impacted by the COVID-19 was completely reversed due to measures taken by the government to control the spread of pandemic including strict lockdown and gradual opening of economy.
"There has been visible recovery in domestic economy since COVID lows, which is also translating into strong business/ profitability performance from companies across the spectrum. The earnings growth momentum witnessed in September 2020 quarter accelerated further in the December 2020 quarter. The market is also seeing strong liquidity conditions," Harsha Upadhyaya, President & CIO - Equity at Kotak Mahindra Asset Management Company told Moneycontrol.
"While it is difficult to predict short term market movements, some choppiness at higher valuation levels cannot be ruled out. However, we continue to remain positive on medium-to-long term outlook for domestic equities. The conditions seem favourable for continuation of foreign flows into the country even this year," he said.