Cautious Optimism Warranted Right Now!
The markets do not seem to be in any mood to retrace while sectoral rotation is happening at a very swift pace. Banking, as witnessed during last week, attempted to catch up with the markets with the Bank Nifty index rising by 7.27 per cent as compared with the Nifty gains of 2.18 per cent. The small-caps, as represented by Nifty Small-Cap, dominated the market moods by gaining nearly 5 per cent in the past one week even as the Nifty Mid-Cap index managed to marginally outperform the Nifty, gaining 2.19 per cent in a similar period.
The participation of PSU banks, automotive and financials was the highlight of the week gone by. The PSU Bank index jumped 4.83 per cent. In the automotive space, Tata Motors and Hero Motor Corp were the star performers. The management of Tata Motors announced that it aims to make the company debt-free in three years while also stating that it was operating at its highest profitability before the virus-led lockdown hit the Indian economy. This triggered bullish sentiment in the scrip. Nifty Auto has been up by more than 3 per cent in the past one week.
Nifty FMCG and Nifty Metal slipped marginally, indicating profit booking in FMCG and metal stocks. Nifty Infra was the other sectoral index that was down while all the other sectoral indices were trading in the green. The two-wheeler stocks were seen trending positive as the markets was optimistic about the government reducing the GST rates from 28 per cent to 18 per cent for this vehicle category. With rising markets comes the risk of consolidation and correction. Investors must protect their profits in such situations. Hence, further aggressive buying at these levels should be extremely stock-specific.
The 10-year G-Sec yields have rapidly climbed by 35 bps over the last three weeks which implies that the cost of borrowing will increase for both the Government of India as well as corporates. This may happen despite the ongoing accommodative monetary policy. Inflation could tick up and soon the risks of stagflation will occupy investors’ mind. Stagflation is a situation with rising inflation and slowing growth, which may not be a conducive for equity rallies. Investors should remain optimistically cautious. While the current movement looks farfetched by any standards, there are signs of fatigue in the momentum.
Investors need to heed caution and should avoid taking leverage positions on the long side. At the same time there is no weakness as such, which may prompt investors and traders to take leverage positions on the short side. Going forward, in all likelihood it looks like the mid-caps may outperform. Investors can concentrate their research in identifying opportunities in this space to suit their individual risk profile. Meanwhile, with the government attempting to revive and support the economy, investors would do well to keep a close watch on this front. The announcements may set the tone for a rally in some sector-specific stocks.
