Is liquidity driving markets away from reality?

Markets consolidated throughout the week after touching newer lifetime highs. The economic situation of India is on the road to recovery at a slow and steady pace but certainly not at the same rate as the markets. Stock markets are factoring in a lot of future earnings growth and the uncertainties due to Covid might puncture expectations to an extent, going forward. However, currently investors aren’t considering the future ifs and buts and are flocking towards stocks only for their inflation beating nature. India VIX has fallen from 80 in early 2020s to 15 now which indicates the lack of fear keeping indices afloat. However, not all liquidity is being directed towards the right stocks and across markets there has been an emergence of “meme” stocks wherein retail investors have been pumping money without any fundamental reasoning. What is worrisome is stock markets are being considered a game for making quick money. This is in-line with the trend seen in IPOs with record subscriptions some crossing 100x as liquidity is rampant. Similarly, the unlisted space is also witnessing high demand, pushing share prices to exorbitant levels. From the listed stocks, travel, tourism and hospitality sectors have been trading near their highs despite the ground situation not being rosy. Given the undeterred rise in the markets despite the hurdles faced by the real economy, it is evident that valuations are accounting for high amounts of earnings growth which might not recover as fast as expected. Investors should therefore be cautious before entering such stocks just because of FOMO. It’s time to take some profits.

Event of the week

This week the Fed moved up its timeline for rate hikes as inflation rises in the US. This calls for some consideration as to what the RBI would do in the next MPC, given that just 2 weeks back they were still dovish. India’s May retail inflation numbers came in at 6.3% above the RBI’s target inflation and WPI inflation is also rising sharply. While the RBI expects our overall output to fall by Rs.2 Lakh Cr in FY22, what is driving inflation is the decline in bank deposits (savings) and rising discretionary expenditure towards services and products other than essentials. The low interest rate environment is also causing investors to look for higher yielding instruments, driving up “meme” stocks and IPO oversubscriptions in the process. It would be essential to watch how long the RBI remains comfortable with the current scenario as the inflationary pressure is building fast.

Technical Outlook

After four weeks of consecutive green candle, the Nifty 50 index closed negative for the week. The benchmark index was rising on slow momentum and formed a rising wedge bearish pattern which has eventually broken down. As the market is still over-bought in the short term, Nifty index in expected to test 15200 levels in the short term. There might not be a major decline immediately but profit booking cannot be ruled out. Immediate support and resistance are now placed at 15350 and 15900 levels.

Nifty50 Update 04 June 2021

Expectations for the week

Going ahead, markets could witness some profit booking to range bound correction in the near term on the news tossing between the inoculation drive and the new delta variant causing the third wave. Some form of credit incentive to boost health care infrastructure would be good news for equities but off late, sectors such as entertainment, aviation, malls and hospitality & leisure have remained in focus just because of talks around loosening of restrictions in some states. Investors should maintain a safe distance from stocks rising on irrational exuberance. It would be prudent for investors to ride the bull wave in fundamental resilient companies only and avoid temptation in fancy fast moving stocks. Nifty50 closed the week at 15683.35, down by 0.73%.


Markets showing signs of consolidation!

During the week, domestic benchmark indices continued their new high journey albeit with lower derivatives volumes. Compared to last year June,open interest is more or less same but volumes in derivatives are almost down by 30 to 40%. This indicates that intraday volumes have dried down currently either due to peak margin requirements or lack of retail participants’ confidence at the current levels, this is the reason after touching the 15800-mark, Nifty50 couldn’t sustain that level. Overall, the markets remained range-bound with an upward bias. GST collections saw an aberration which came in at Rs. 102,709 crore for the month of May. The dip in the collections was mainly attributable to the severe decline in business activities owing to localized lockdowns. Despite the shortcomings, GST collections were still up 65% on a YoY basis and continued to maintain itself above the crucial Rs. 1 lakh crore-mark for the 8th month in a row. Better-than-expected GDP data, positive IIP performance and GST collections being maintained over a Lakh Cr-mark, all indicates that the economy is exhibiting necessary resilience despite the second wave, further boosting the overall market sentiment.

With improving various economic strata, equity mutual funds continued to witness net inflows for the third consecutivemonth at about Rs. 10,083Crs in May 2021, scoring a 14-month high. This was primarily driven by the trend of retail investors moving from DIY investing and favoring professionally managed funds for their long-term investing needs. Government in its economic review report stated that frontloading of fiscal measures would be essential to revive consumption and investment in the coming quarters. They also added that economic fallout from the second wave may be restricted to just Q1FY21. In order to jumpstart the growth engine of India Inc. and prioritizing sustained recovery in demand led growth, government with its full firepower have increased capex by 66.5% YoY in April and managed to have a softer impact on manufacturing and construction activity from second wave of COVID-19. With numerous indicators suggesting path towards economic recovery, the markets are likely to sustain the bull market in the medium term with near term hiccups.

Event of the week

World’s most important commodity market was the centre of attention during the week. Traders on New York Mercantile Exchange have picked up call options tied to Brent and WTI crude-oil prices betting it to reach USD 100 by December 2022. This comes at a time when oil prices have already surged nearly 41% this year and it’s just over a year after the pandemic crushed energy demand which pushed WTI below zero. It appears that international traders are betting on higher volatility more than speculation on higher oil prices. Signs of exuberance are visible in the oil market and hence it would be wise to book profits in Oil Stocks. Warren Buffett too has recently sold a good part US oil giant, Chevron Corp.

Technical Outlook

Nifty50 index closed on a positive note touching new all-time high. The index now seems to be finding the new range on the higher side as the dip up to 15560 on Wednesday was quickly bought into. Nifty index rallied more than 10% from the recent correction low and hence a mild pullback cannot be ruled out. Given that the market is rallying on a slowed-down momentum, which can be properly visualized with the help of negative divergence in RSI on daily timeframe. Any sustained close below 15400 should be treated as RED signal for short term. As long as benchmark index is trading above 15400, we suggest traders maintain a bullish bias on market.

Nifty50 Update 11 June 2021

Expectations for the week

The following week could remain volatile on US Federal Reserve’s commentary which so far had hinted at keeping interest rates near sub-zero levels in order to keep the liquidity in the economy. Any development on the same would be keenly awaited. Though at current juncture, increase in rates and tapering fears appear kind of muted, with the US 10-year Treasury yield already hovering near the bottom end of its recent range. Meanwhile back home, primary markets would gain traction with two upcoming IPOs while secondary market would keenly focus on finalizing process of privatization by Government. Long term investors are advised to continue with their investments in marquee names in a staggered manner. Nifty50 closed the week at 15799.35, up by 0.82%.


Hopes and Liquidity Propel Markets Higher!

Benchmark indices hit lifetime highs with positive signs for the third straight week in a row.Somewhere between the steady decline in daily COVID-19 cases and pickup in inoculation drive, India’s Corporate profit to GDP ratio hit a 10-year high in FY2020-21. This occurred despite a contraction in revenue as the cut in operating costs aided margins along witha shrinking economy in terms of GDP.Now, the profits of India Inc. primarily represent the formal economy and the pandemic only escalated the shift in market share from the unorganised to the organised sector just like GST, demonetization and RERA have done in the past couple of years. This continuous shift in market share has led the poorest of the poor to experience great pain, especially in the second wave, despite several liquidity measures and interest rates at rock bottom levels.

In this week’s Monetary Policy too, the RBI kept interest rates unchanged inline with the US Fed and European Central Bank who have repeatedly remained accommodative on their stance. Central bankers in developed countries appear to be much more comfortable with a modest to fairly higherlevels of inflation now. This suggests that the historic expansion in central bank’s balance sheets over the last year is not likely to be unwound anytime in the foreseeable future. The biggest threat of inflationary risk is also fast receding from an investor’s mind with the growth from the formalised sector catching up to pre-Covid levels. With stock markets constantly making new highs, it is quite plausible that some overheating could create a near term correction sooner or later buteven then, investors can slowly and steadily accumulate the good quality stocks from a fundamental perspective.

Event of the week

Sugar stocks have been experiencing multiple long-term and short-term tailwinds since some days. In lieu of rising oil prices globally, the government recently brought forward its target date to 2023 for achieving 20% blend of ethanol from the current 7%. With the accelerated need for ethanol, sugar companies are bound to see capacity expansion for ethanol production, driving higher margins compared to the current sugar realisations. In the near-term, supply constraints and output limitations from major exporters such as Brazil, Thailand and EU, augurs well for Indian sugar prices. However, investors must keep in mind the cyclicality of the sector and the FRP, subsidy prices before jumping into the bandwagon as there are several risks involved despite the favourable macros.

Technical Outlook

Nity50 index has crossed the major rising channel support and is now trading around it. Market breadth also remained positive for most of the week but BankNifty is still a point of concern given that it is still trading below its previous resistance. BankNifty might take its own time to catch up but it can also turn out to be a classic Dow Theory divergence where one index is making a new high but the other is making a lower high. Until we don't see any significant bearish evidence, we suggest traders maintain a mildly bullish outlook. The immediate support is now placed at 15350.

Nifty50 Update 04 June 2021

Expectations for the week

The fourth quarter result season pace has been comparatively slower this fiscal and large/mid cap companies from several sectors have already announced their earnings. The coming weeks could see a number of PSU stocks such as SAIL, NTPC, Coal India etc. in focus as they come out with their numbers. Further, built up on the disinvestment front could also keep the PSU stocks in momentum. Investors should therefore rationalise their trades on PSUs to buffer from any unforeseen shocks owing to result announcements.Meanwhile, Indian markets can continue to mimic the movement across global commodities and equities. Nifty50 closed the week at 15,670.25, up by 1.52%.