Surfing the Big Wave
It has been a momentous week so far for the stock markets in the west as well as in India. On Wall Street, investors greeted the Joe Biden administration with enthusiasm, sending US’ markets to new highs. As a result, the new US President Joe Biden has logged the best stock market rally from Election Day to Inauguration Day in history. In the 11 weeks between the November 3, 2020 election and swearing-in ceremony day close i.e. Wednesday, the S & P 500 surged a stunning 14 per cent. Meanwhile, in India, the BSE Sensex hit the landmark level of 50,000 for the first time ever on Thursday.
It took about 33 trading sessions for BSE Sensex to climb from the 45,000 to 50,000 mark and the last 1,000 points’ gain was registered in just nine sessions. The Nifty too has scaled past the 14,700 mark for the first time ever, driven by expectation of turnaround in the economy post-pandemic vaccinations and cheap liquidity. When the secondary markets’ sentiments are buoyant and there is excessive liquidity in the system, the time is ripe for promoters and their angel investors to launch IPOs.
The recently concluded IPO from the finance arm of the Indian Railway, IRFC, saw a good response, while the ongoing IPO of Indigo Paints, whose brand ambassador is the well-known cricketer M S Dhoni, is also witnessing a dazzling response.
The overheating of the IPO market and demand for new securities can be attributed to the fact that the bulk of IPOs in calendar year 2020 has helped investors turn wealthier in a very short span of time and has acted as a sure recipe for making quick bucks. We believe that overall the trend of the primary market is expected to continue and may remain in sync with the mood of the secondary market. Going forward, all eyes would be on the index pivotal i.e. Reliance Industries which will announce its Q3 earnings on January 22.
The stock had underperformed the Nifty in the past four months and during the phase of underperformance the stock managed to take support around its long-term moving average of 200-EMA, which resulted into the formation of a strong base around this level. Recently, the stock has staged a smart rally by gaining nearly 9 per cent in the current week. In Q3 earnings, the key focus would remain on its telecom and retail businesses. Morgan Stanley expects the telecom EBITDA to remain stable while retail should rebound back to the pre-pandemic levels in terms of profitability.
Any pleasant surprise in Q3 earnings has the potential to take the stock towards levels of Rs 2,190 in the short term and any disappointments in earnings would take the stock back to Rs 2,000. Thus, the outcome of Reliance Industries’ earnings could dictate the trend of the markets in the short term. Another key factor which market participants should keep a lookout for is the US Dollar index. We are aware that the current rally witnessed in indices has had a solid tailwind in the form of the US Dollar index depreciation.
If the US Dollar index manages to go beyond the 91.5 to 92 mark, indices could find it hard to continue their upsurge. The latest bullish spell in the stock markets has benefited the entire market and reflects the popular adage, ‘A rising tide carries all boats’. In our opinion, investors should utilise this opportunity to knock off the weakest stocks in the portfolio and stick to quality stocks. As for the market performance, we expect them to keep up the positive momentum as long as the liquidity tap is kept open to counter negative sentiments.
