“Domestic market may consolidate for some time before resuming its rally. Technically too, the trend remains intact for an up move towards 16,000-mark. Globally, investors would cautiously track what action other central banks take following Fed’s hawkish announcement,” said brokerage firm
in a note.
The US Federal Reserve’s surprising tilt towards discussing the eventual normalization of its extraordinarily accommodative monetary policy has caused some flutters in the global markets this week.
The Fed’s commentary resulted in a strengthening of the US dollar index, which weighed on emerging market equities like India. The Nifty50 and BSE Sensex ended with weekly losses for the first time in five weeks as risk appetite took a beating.
While the Fed’s words did cause some pain, the secondary market’s performance was also hindered by the high activity in the primary market where four initial public offerings were inviting raising close to Rs 9,000 crore from investors.
Analysts noted that even prior to the Fed’s bolt from the blue on Wednesday, there were emerging signs that investors were growing increasingly restless of the sort of rally seen in certain smallcap and midcap stocks of low quality.
“The most worrisome aspect is the froth that can be seen in some of the lower quality stocks. Betting on cyclical revival is fine with me, but betting on perennial money losing companies with no concrete plans for turnaround is more a sign of blind speculation,” Dinesh Balachandran, fund manager at SBI Mutual Fund told ETMarkets.com in a recent interview.
Currently, Nifty50 is quoting over 20 times one-year forward earnings, while the smallcap and midcap indices are on the verge of trading at a premium to their largecap counterparts for the first time in years.
Defensive sectors like information technology and fast-moving consumer goods companies emerged the top performers during the week as haven-seeking investors rotated funds towards these sectors, who are known for their low volatility. The Nifty IT and Nifty FMCG index rose 0.8 per cent and 1.8 per cent, respectively.
“People are treating the stock markets as a get-rich-quick scheme, which is worrisome. A similar trend is seen in IPOs with record subscriptions, with some crossing 100x as liquidity is rampant,” said Nirali Shah, head of research at Samco Securities in a note.
Shah is of the view that investors should remain cautious from a near-term perspective as the market’s recent rally is not factoring in the hindrances faced by the real economy because of the pandemic.
“…it is clear that bourses are assigning valuations based on future earnings growth rates that may not come to fruition,” Shah said.
Investors will, however, keep a tab on how the monsoon progresses, further signs of easing of restrictions by states and green shoots of revival in consumption demand to form their view on whether to accumulate or sit tight till the froth clears.
