The ‘risk on’ in global equity markets got a further boost with the passage of the $1.9 trillion US fiscal stimulus package, but experts feel that Indian markets may not see a vertical move, though bouts of consolidation cannot be ruled out.
We are just 400 points (2.6 percent) short of record highs at 15,431 on the Nifty. The Nifty50 could well reach record highs in the near term but, expecting a runaway rally is something that might not be possible. Hence, there will be bouts of consolidation, say experts.
History suggests that the passage of the stimulus package will give boost flows, especially into emerging markets such as India, but this could also mean a rise in inflation. All eyes will be on the upcoming US Fed meeting and future commentary.
The Biden administration said stimulus payments and other measures will boost economic growth and help Americans hit by the Covd-19 pandemic, which is continuing to claim 1,400 lives in the United States each day.
What the experts anticipate
“The $1.9 trillion stimulus package can facilitate further FII inflows into EMs like India since the cost of capital will continue to be very low for an extended period of time. Stabilisation in US bond yields is another positive factor,” VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, told Moneycontrol.
“However, markets are unlikely to move up hugely from the present levels because valuations are high. And, at high valuations, profit booking can be expected,” he said.
Americans would begin seeing the first direct deposits from President Joe Biden’s $1.9 trillion Covid-19 relief package hit their bank accounts over the weekend, a Reuters report said on Friday, citing Treasury and Internal Revenue Service officials.
“In our view, the expectation of a faster economic recovery along with satisfactory progress of a vaccination rollout is likely to stoke inflation in the coming months and therefore bond markets are expected to remain volatile,” Binod Modi, Head – Strategy, at Reliance Securities, told Moneycontrol.
“Given the stronger real growth and sustained corporate earnings rebound, we believe equities should continue to offer a better risk-reward proposition. We maintain our Nifty target at 16,300 for 2021,” he said.
Jay Thakkar, Vice President and Head of Equity Shares at Marwadi Shares and Finance Ltd, told Moneycontrol that the Nifty50 may consolidate within a range of 15,400-14,800 for the next couple of days/weeks.
“Once, this consolidation is over, the breakout is likely to happen on the upside, which should take it to the 15,700-16,000 level,” he said.
Impact on US dollar, Gold and Bond Yields
Any rise in US Yields could put pressure on equity markets.
A huge fiscal stimulus will certainly help the USA to foster an economic recovery by stimulating consumption and investment activities, but at the same time it will lead to a rise in inflation, which could lead to some volatility in bond markets, suggest experts.
“Emerging markets, including India, should be benefiting with a fiscal stimulus in the USA as we had seen in 2020. However, emerging prospects of a faster economic recovery are likely to discourage investment in risk-free assets and therefore bond markets are expected to remain volatile,” said Modi of Reliance Securities.
Thakkar of Marwadi Shares and Finance Ltd is of the view that EMs will not be directly impacted but the stimulus would be positive for US markets as well as for gold.
“The US Dollar Index and Bond yields are likely to slide as the overall trend for the medium to long term is negative for them and positive for Equities and Gold,” he said.
What should investors do?
The next big question is what should investors do? Will FII-heavy stocks tend to benefit the most from the stimulus package?
Experts feel that investors should stay with sectors that are likely to benefit the most from growth in the economy along with consumption, IT and pharma.
“Pharma stocks will benefit out of this, mainly those stocks that have a good market share in the US, including Sun Pharma and Lupin; as will textile stocks such as Welspun India and Kitex garments; and companies from the food processing sector, including Apex frozen, Avanti feeds, Godrej Agrovet and Venky’s,” said Thakkar of Marwadi Shares and Finance Ltd.
Vijayakumar of Geojit Financial Services is of the view that IT stocks have been on the FII buy list and are therefore very firm. Financials, particularly of leading private sector banks, have more room to move up.
“In fact, all economy-facing stocks are likely to do well since the economy is expected to rebound sharply with a GDP growth of 12 percent in FY 2022. This can translate into earnings growth of above 30 percent, aided by the base effect and sharp pick-up in demand,” he added.
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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