Photo: Reuters
Photo: Reuters

A pullback rally brings hope, but it’s time to be cautious on bottom fishing

  • The bellwether Nifty 50 once again crossed the psychological 11,000-point as it gained about 1% during the week
  • Against these odds, this hope rally may find it difficult to sustain

Indian equities recovered sharply late last week on hope that the government would come out with measures to alleviate the surcharge on foreign portfolio investors. The finance minister’s meetings with industry leaders to seek solutions to revive growth led to an all-round rebound this past week.

The bellwether Nifty 50 once again crossed the psychological 11,000-point as it gained about 1% during the week. A positive was that the talk of likely removal of FPI surcharge seems to have bought back the foreign investors into the market. Their heavy selling over the past few weeks turned into marginal buying on Friday, with net cash purchases of about 200 crore for the first time since July 1, 2019, according to provisional figures from the Securities and Exchange Board of India.

But while all that is good, investors need to watch the earnings numbers. On that score, the signs have not been that encouraging. Earnings continue to remain weak and that could keep stock markets choppy. “Volatility is going to be a feature of this market going forward for the next few months. Corporate earnings in 1QFY20 do not look encouraging so far, and a revival may take time," said Rajeev Srivastava, Head Retail Broking, Reliance Securities Ltd.


Besides, the risks to the stock market will remain as earnings downgrades could be on the cards once the result season is over. This marks a big change from the optimism that was seen just before the earnings season began. “We see 18% growth in net profits of the Nifty-50 Index versus 24% at the start of 1QFY20 results season," noted a report from Kotak Securities Ltd for institutional clients.

Of course, a correction has bought down valuations of the Nifty 50 index. A consensus had pegged the Nifty 50 to be trading at about 17 times next twelve months earnings. It may seem optically attractive and it is even getting the bottom-fishers out of their hibernation.

But global growth and domestic consumption headwinds still remain. “Looking ahead, we no longer expect any fiscal stimulus to revive growth and believe that any revival will happen only via domestic monetary policies and global growth," said JM Financial Institutional Securities Ltd in a note to clients.

Against these odds, this hope rally may find it difficult to sustain. In the end, there is no better proof than an earnings or more concrete signs of policy change.

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