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Last Updated : Nov 09, 2019 08:10 AM IST | Source: Moneycontrol.com

Rally has taken us back to premium valuation, may influence performance in the short-term

The risk profile of the global markets has reduced due to positive developments between the US and China trade deal.

Moneycontrol Contributor @moneycontrolcom

Vinod Nair

The rally in the past two months has been broad-based with a strong performance from all the segments of large, mid and small-caps.

Initiated by the corporate tax cut announced on September 20, it rallied further due to positive signs of earnings growth from the ongoing Q2FY20 results and reduction in raw material cost.

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The best part of the Q2 results is that the banking sector saw better financial performance with improvement in asset quality providing a sign that credit growth will return and non-performing assets (NPA) will be resolved.

The Q2 results also provided hope that earnings growth in the second half of FY20 will expand due to more reforms, government stimulus, improvement in the global economy, post-monsoon season and cut in interest rates.

This week, Finance Minister Nirmala Sitharaman's proposed measures for the realty sector seemed to be a good start towards addressing problems in the space.

They are likely to outperform in the short to medium-term since it will help start some stalled projects and give a positive ripple effect to banks, non-banking financial companies (NBFCs), and the cement and construction sectors.

But given that there are a large number of inventories and stalled projects due to low demand and financial stress of developers, we need a more calibrated approach to resolve the issues, which could take some time.

In the auto sector, as per the latest data from domestic original equipment manufacturers (OEMs), the sales volume is below consensus. However, on a month-on-month (MoM) basis, cars, two-wheelers and three-wheelers have displayed signs of a pickup.

We believe that the transition to Bharat Stage VI (BS-VI) and revival in core sectors would be the key trigger for the auto space. Currently, the good monsoon is providing support to tractors and two-wheelers will benefit in the future.

We at present have a neutral stance on the sector but may consider upgrading the rating on auto stocks in the coming months or quarters since valuations are getting attractive.

The risk profile of the global markets has reduced due to positive developments between the US and China trade deal.

Foreign Institutional Investors (FIIs) are also turning positive since trade issues between the US and Europe and Brexit has reduced and interest rate stance has upgraded from neutral to dovish.

Additionally, the economies of the US and Europe have stability which may have a positive effect on Asian countries' economies as well. FIIs are considering shifting from safe-haven assets like Gold, US Dollar, US debt and equity assets to riskier Emerging Markets.

FII equity inflows in India turned positive from October to around Rs 15,000 crore and are likely to be positive further, led by reforms and an upsurge to the economy in the future.

But they will be watchful due to weak financial position of the government due to cut in corporate tax cut and a slow economy. The government is hoping that divestment, spectrum sales and dividends will be an important source of income for the rest of the year.

The Nifty, Nifty100 and Nifty500 rallied by 11-12 percent. Valuations are back to premium levels specifically for large and blue-chip stocks which could have some impact in the trend of the market in the short term. But outlook for equity market has improved a lot for long term gains.

Nifty Midcap and Smallcap are up by 6-9 percent and may have to catch-up more in the short-term as valuations and economic outlook has improved.

 

The author is 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.

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First Published on Nov 9, 2019 08:10 am
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