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What investors should do as market hits record high; don’t ignore these 5 signs

Indian market rose more than 10% in SAMVAT 2076, and with the economy seeing green shoots and there is stability in earnings – the trend is unlikely to change, say experts.
Nov 17, 2020 / 02:31 PM IST

SAMVAT 2077 started with a bang on the muhurat trading day as both Sensex and Nifty50 hit fresh record highs. The S&P BSE Sensex came closer to 43,900 while Nifty50 also came closer to 12,900 levels.

Liquidity wave is clearly driving the rally on D-Street pushing both Sensex and Nifty to record highs. The rally may not be over but experts advise caution as the move from current levels might not be linear – unlike what we saw since April.

Foreign portfolio investors (FPIs) have invested a massive Rs 35,109 crore in Indian markets in November so far as corporate earnings and reform measures undertaken by the government to revive investment activities kept the investor sentiment upbeat.

Also Read: FPIs remain positive on Indian markets

FPIs invested a net sum of Rs 29,436 crore into equities and Rs 5,673 crore into the debt segment between November 2-13. FPIs had invested a net sum of Rs 22,033 crore in the preceding month.

The liquidity seems to be keeping the sentiment alive on D-Street but these is another wave which is getting overlooked i.e. COVID-19. Vaccine hopes have certainly provided the respite but the recent surge in Coronavirus cases across the globe could derail the rally as countries inch towards possible extended lockdowns.

There is certainly risk-on sentiment in the market largely because of a possible stimulus package from developed countries such as US, Europe etc., and back home PLI scheme and Atmanirbhar Package by the Indian govt. also helped sentiment.

Data suggests that the US, Europe and Asian markets are up by 10 percent, 15 percent, and 10 percent, respectively, month till date. Indian market rose more than 10% in SAMVAT 2076, and with the economy seeing green shoots and there is stability in earnings – the trend is unlikely to change, say experts.

However, experts advise caution. We are trading in the unchartered territory; hence, a pause or mild consolidation can be in the offing. But, the important message to investors is to stay put in this market which is likely to touch fresh record highs in SAMVAT 2077 or the next 12 months.

“There are no reasons to believe that the trend will reverse soon. Of course, a pause and a mild consolidation is possible as a gap is developed between the market and economy, which is normal in a rising outlook,” Vinod Nair, Head of Research at Geojit Financial Services told Moneycontrol.

“However, temporary correction due to profit booking cannot be ruled out because the market is highly optimistic that the vaccine development will rapidly improve the ground reality. The world market will now try to wait and foresee the timing and size of the global stimulus. We can expect a short-term correction but positive in the long-term,” he said.

We have collated a list of 5 signs which investors should watch out for:

Narrow Rally, but will it continue?

The rally is narrow. Data suggests that about 15 sectors fell more than 10 percent since record highs, compared to 3 which rose more than 10 percent in the same period. The trend signifies that the rally was just focused in IT, pharma, and Reliance Industries (Jio).

But, experts feel that the rally could now get broader as the economy is showing signs of recovery. “This is a very narrow rally and could be explained by the fact that only a handful of sectors were not impacted by the corona virus pandemic,” Gopal Kavalireddi, head of research at FYERS told Moneycontrol.

“But, with economic activity expanding to other sectors and recent quarterly results reflecting improvement in sales and operating profits, renewed participation from other sectors can be expected over the course of next 6-12 months,” he said.

IT and Pharma sectors have delivered amazing returns in a short period, with many stocks returning more than 100% from the under-owned, undervalued pharmaceutical, drug, and lab segments.

Kavalireddi further added that post Q2FY21 results, minor profit booking was seen in pharma companies. However, with new launches, ANDA pipeline, and better-operating margins, this sector will retain investor interest.

What are global brokerages saying?

Global brokerage firm Nomura is of the view that Nifty may hit the level of 13,640 by December 2021. The upside risk to the target multiple in the near-term remains, on the back of strong capital flows.

"Factoring in 4-5 percent risk to FY22/23 consensus earnings estimates and using 19 times on December-22 earnings, we arrive at December-21 Nifty target of 13,640, implying upside of 7 percent from the current levels,” it said.

Recently, Goldman Sachs upgraded India to 'overweight' and raised Nifty50's target to 14,100 which it expects by 2021-end. The market has moved higher as investors gained confidence on improving economic momentum, Goldman Sachs noted in the report.

What are analysts saying?

In an analysts' poll conducted by Moneycontrol, as many as 50 percent of the respondents said Sensex will trade above 43,000 while 37.50 percent expect Sensex to see some consolidation and trade in the range of 42,273-43,000.

Only 12.50 percent of respondents expect Sensex to remain in a broader range of 40,000-42,000 during Samvat 2077.

Also Read: Positive momentum to continue in Samvat 2077

For Nifty, as many as 62.50 percent of respondents expect it to trade between 12,400 and 13,000 for Samvat 2077. The remaining 37.50 percent expect Nifty to trade above 13,000.

The new Samvat is expected to augur well for mid and small-caps, too, and 75 percent of respondents believe they will outperform the benchmarks.


Sectors to lead the next leg of the rally


Banks and Financials would be one of the best sectors to invest in and hold on to. IT and Pharma are preferable while the Auto sector could be the dark horse over the next 12 months.


“We expect the cyclical sectors like auto and consumer durables along with BFSI will continue to lead the current leg of the rally especially post the significant underperformance in CY2020. We also sectors like Chemicals, IT and Pharmaceuticals will also continue doing well given strong growth dynamics and revenue visibility,” Jyoti Roy, DVP Equity Strategist, Angel Broking Ltd told Moneycontrol.


“The Q2FY21 numbers so far have been ahead of street estimates while management commentaries too have been positive. Concerns over asset quality issues surrounding the banking sector too have gone down significantly post the Q2FY21 numbers wherein most of the companies have reported better than expected set of numbers,” he said.


Joy further added that most Auto companies have been reporting very strong monthly sales numbers with demand expected to remain strong in the near term.


What should investors do?


Amit Shah, Head of India Equity Research, BNP Paribas told Moneycontrol that we would recommend investors to take some profits here on the back of the strong rally and see-off the rest of the year (enjoy the festive season) and await company management commentary post 3QFY21 results to get a clearer picture and more conviction in FY22 growth estimates.


“The NIFTY at current levels is trading at 19x FY22 earnings while the five-year average is 17x. In a liquidity-driven environment this may not be a big premium, but when you see the earnings estimation for FY22 over FY21 is where we get worried,” he said.


Shah is of the view that FY22 Street estimates mark for a 40% earnings growth over FY21 which seems a stretch to us, making current Nifty levels a bit expensive.

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.
Kshitij Anand is the Editor Markets at Moneycontrol.
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