Redemption pressure from domestic institutions and possible hike in global volatility are the watch list today.
Last week, the market tested new highs each day supported by better-than-expected GDP data, advancement in vaccine development and RBI’s decision to hold rates and to maintain an accommodative stance for a long time.
The focus area was banking & financial sector due to major events like moratorium hearing, MPC meet and RBI’s curb on digital services. The market also showed a huge interest and preference to shift from the main to the broader markets - into left-out mid, small, micro stocks and cyclical sectors.
This week, reports of emergency vaccine rollout in India and hopes of a stimulus package in the US and Japan helped in maintaining the momentum. But after the continuous bullish rally, the domestic market reversed along with Asian peers, backed by weak global markets, triggering profit booking across major sectors.
The overall positivity continued this week but with an increase in volatility. A sell-off was seen in the US tech stocks, due to antitrust lawsuits and dragging stimulus package talks, which led to correction in the US market.
European indices also dragged ahead of the European Central Bank monetary policy, increasing number of COVID cases and increasing chance of no Brexit deal. Post the ECB meeting, announcement was positive with an increase in stimulus package, but European markets fell as it was over weighed by the fact of moderate usages of the stimulus plan for the time being.
In India, PSU Banks, small and midcaps which were so positive recently, also disappointed with marginal bearishness. Markets being at highest level, any unfavourable events, domestically or globally, can result in temporary profit booking. However, we believe that the market is optimistic enough to hold the rally post a required consolidation.
It is being advised to turn a bit cautious, in the short-term, as much of the momentum was driven by sudden influx of FII money, which can take a pause.
From May 2020, we had the best ever net inflow of Rs 1,85,000 cr, in a span of less than 8 months, including the best month of November with Rs 70,000 cr inflows.
During the same period of 8 months, DIIs net sold Rs 88,000 cr in equity market. FIIs had turned positive because of availability of huge amount of funds post the stimulus packages announced in developed nations.
Easy money policy moved to EMs slowly. India had an edge due to reformist measures announced before Covid, new measures post covid (like PLI, NPA measures, guarantee to MSME), curtailing virus cases and strong pharma capabilities to overcome the crisis, which resulted in a better outlook compared to EM peers.
Indian rupee is strongly leaping against the USD, and is amongst the most stable and outperforming compared to other Asian peers, in the last 6months.
Having said that, volatility is noticed in US market recently with hike in VIX index (volatility measurement) from 20x to 22.5x and stagnation in main indices. We should also note that a lot of the betterment, seems to be factored in the market, and trading at premium level.
Broader market, like Nifty500 is up by 55%, and Niftysmall100 index is up by 80% from their respective lows of March. Nevertheless, valuation wise they are at historical peaks factoring double-effect gains from high liquidity and earnings growth in the coming quarters.
Hopes of vaccine and stimulus packages in India and developed nations is raising the spirit of equity market. However, it is advisable for investors to have rational view, avoid leverage and consider partial profit booking in pockets which are trading at very high level, including superbly valued large & midcaps. In terms of small & micro caps, though the momentum is expected to remain positive in the medium-term, vigilance is warranted.
Domestic Institutional Investors are on a selling mode. MFs have sold Rs 45,000 cr while total domestic institutions Rs 65,000 cr, in Oct and Nov. In total, MF have net sold Rs 66,000 cr of equities in last 8months. This is believed to be mostly from HNIs and corporate segment, as SIP trend from pure retail investment is continuing in positive trend.
The selling could be from risk averse investors turning cautious due to quick reversal of the market in record time. We can expect this selling pressure to reduce soon, with the risk averse investors realising that the economy is recovering stronger, transforming their sentiment. On a tactical basis mutual funds and investors will turn positive if there is consolidation in the near future, in a price or time manner.
At this time, if FII inflows reduces, which is possible given increase in global volatility, it will have a double-whammy effect on the market, triggering a moderate bearish trend. The negative trend of DIIs and MFs is expected to continue, due to redemption pressures.
The level of cash in MF schemes is also low considering the redemption pressure and profit booking is expected to continue at least in the short-term. This will not help the market to stabilise unless prices and sentiment of risk averse investors improves.
(Author is Head of Research at Geojit Financial Services)Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.