Retail investors can turn a bit cautious, in the short-term, post the solid performance from the COVID low and heavy gains in this month. Nifty50 is up by more than 10 percent while Midcaps are by 15 percent, during the month.
At this juncture, investors should start at least to consider booking profits in stocks where returns are decent. We should be careful that FIIs inflows for this month, which breached to a new high after the investments being slowed from September to October, before the US election month. The sustainability of the same amount of inflows will be difficult in the coming months. Foreign investors will take a breather and check the new fiscal and monetary policy to be undertaken in the US by the new government and in Europe Union, for the next year of 2021.
If we look at the recent performance of the market, Mid & Small caps have started to outperform, which can continue in the near-term. Many stocks in mid, small and micro caps have started to catch-up with the performance of their larger peers. Late starters like Banks, NBFC, Metals, Auto and Real Estate sectors can continue its trend, in the near-term. This is a typical cycle of the market where performance is triggered by large caps and ends with the smaller ones. And in this case, for the mid & small caps to maintain its trend of outperformance, the economy has to normalize & new stimulus has to be provided, which may take another 6 to 12months, depending on the government’s plans, availability of vaccine and rate of virus spread.
For the full year of 2021, we can expect the trend to continue led by the next set of liquidity measures and corporate earnings. Earnings are expected to grow on a QoQ basis as the economy is moving towards normality. In H1FY21, the business has improved due to pent-up demand, good monsoons, festival seasons and re-opening of the economy. Better profitability is also by increasing the selling price of products and lowering discounts due to low demand, taking example from businesses like cement.
Demand has increased for a few segments like electronics, telecom and household items to improve the quality of family staying at home and to work from home. Cost control has also been an important factor to maintain profitability of companies by holding employee strength & salary, incentives, lowering marketing & sales and other expenditures, given lower demand and economic uncertainties. These strategies are likely to stay till the economy normalizes.
This week, market rally was muted due to profit booking across sectors, as expected. Western markets continued its positivity, being encouraged by news on vaccine developments, higher sales from Thanksgiving season, ease in the US political risk and likely appointment of Janet Yellen (ex-FED chairman) as treasury department head. We can expect profit booking to continue in our domestic market, in the short-term, maybe starting from large caps, as the liquidity-driven rally can slowdown. This money flow was triggered after the US election results unleashed high amounts of funds which were put on-hold during September to November. After the huge inflows of pending & new funds, FIIs could take a breather and check-on the next phase of policies in the US and Europe for 2021.
In the likely consolidation, the overall market will be weak but best sectors to hide will be defensive stocks and sectors with a stable business outlook like IT, Pharma and FMCG. Interest sensitive sectors like Banks & Auto may maintain its buoyancy, in the short-term, given the late rally driven by pent-up demand and regulatory development. RBI’s proposal to consider large & well-managed NBFCs to be converted into banks and to raise promoters’ stake in private banks to 26 percent, is taken well by private banks, NBFCs & new banks. Generally, all banking stocks are re-rating in the last 3 months, assuming revamp in credit growth and fall in NPAs, going forward.
By Friday, the market turned a bit weak due to uncertainty related to the efficacy of COVID vaccine and in expectation of Q2 GDP data. Although GDP is expected to improve compared to the previous quarters, the recovery in the Indian economy is likely to be lower in comparison to its global peers. The volatility throughout the week was at elevated levels and witnessed weakness in the latter half leading to profit booking.
(Vinod Nair is the Head of Research at Geojit Financial Services.)Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.