The stock market will remain a buy-on-dips one since stocks are now in a structurally long-term bull market, feels Umesh Mehta, head of research at SAMCO Group. Mehta, who has over 20 years of experience in the capital market, says that the market scaled a new peak on account of support coming in from both mid and small caps, and this was seemingly driven by the optimism around the Budget which comes in February.
Here's an edited excerpt of his interaction with Moneycontrol’s Kshitij Anand.
Q) It was a volatile week for markets but both Sensex and Nifty managed to hit fresh record highs. What led to the price action?
A) The markets scaled new highs with support coming in from both mid and small caps. This was seemingly driven by the optimism around the Budget which comes in February.
Moreover, tech stocks drove markets higher as there are expectations of robust Q3 numbers despite the usual furloughs seen during the quarter.
Metals was another sector that led the momentum as metal prices continued to see hikes in prices and reported optimistic production numbers. The cyclical theme is indeed playing out now and is expected to continue going forward.
Lastly, healthy deposit growth by private lenders also drove the rally in Bank Nifty which traded close to its lifetime highs. All these factors led to the price action in the markets this week.
Q) What are the important levels which one should watch out for in the coming week?
A) With the optimism seen in the markets, the Nifty might continue its momentum and achieve new highs as we go forward. It seems like Nifty is heading towards 14,500 levels in a swift manner.
While the overall market is bullish, it continues to remain overbought in the short-term, and investors should maintain a cautiously bullish outlook unless the market breaches the short term support level of 13,950.
Q) Small & midcaps outperformed in the week gone by. What is supporting the broader market indices?
A) While the large caps were the first ones to react to the faster-than-expected economic recovery, a large part of the small and mid-caps were left untouched due to them being deemed riskier bets.
As the economic scenario has become more stable and optimism is running high in the markets, small and midcaps are playing catch up as they trade at much attractive valuations compared to their larger-cap peers.
The flow of investments to catch these companies at better valuations has driven this growth in the broader market indices and is expected to continue to do so over the coming weeks.
Q) What is your view on the December quarter earnings? Do you think the road to double-digit earnings will only broaden from here?
A) With strong liquidity and macro-based tailwinds supporting the economy, the December quarter is expected to report a strong set of gains, particularly from the IT and the Metal sectors which have seen multiple deals wins and strong production numbers, respectively.
The majority of sectors will report strong growth but the stock price has factored in most of the positives. Hence, investors should wait for a dip before jumping into majority stocks at these levels.
Also, as the economic recovery theme starts to cool down earnings across different sectors might take a breather since the pent-up demand is almost drying up.
However, from a YoY growth perspective, they could still be higher since 2020 saw minimal growth due to the pandemic.
Q) FII flows seem to be losing momentum something which can be seen from the week gone by. Do you think the momentum seems to be fading?
A) India has seen record-breaking FII inflows over the past couple of months which have been one of the critical reasons driving markets to new all-time highs.
Since then, the FII investment flows have mellowed down to more normal levels as the market trades at higher valuations. With that happening, all eyes are now on how the budget pans out which will possibly determine future flows.
Q) Has the market texture changed from buy on dips to sell on rallies?
A) The momentum for the market has been strong enough to drive Nifty to new all-time high levels. With this achievement, the market seems to be stretched on the valuation front at the higher end.
Despite an impending short term correction, markets will remain a buy on dips market since stocks are now in a structurally long term bull market.
Q) Your top 3-5 trading ideas for the next 3-4 weeks?
A) With the result season starting, the IT sector will continue to remain in focus. There are expectations of a positive set of numbers by IT majors just as TCS’ supported by strong deal wins and adoption of new technologies globally.
But, these technology stock prices have rallied a lot and seem to have discounted most of the positives. Hence, traders should get into these bets after watching the sentiment on the Street because it can happen that the trade is overbought and corrects in the short term.
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.
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