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Photo: Mint

Market weathers covid waves, but volatility continues to rattle investors

Markets may probably take a breather till the US elections are resolved. With a decisive mandate, another round of stimulus could be on the cards, which would be good for emerging markets. In that sense, any major dip could find investors opening their wallets a bit more

Global and domestic equity markets continue to be rattled by covid-19 waves and lockdowns, but investors are taking these bouts in their stride. Last week’s Nifty 50’s jump beyond 12,000 for the first time in eight months brought in a marginal selling wave. This shows that at higher levels stocks are edgy as valuations are over pre-pandemic highs.

The Nifty 50’ price-earnings multiple of about 34 times is well above its long-term average and much higher than pre-covid highs. Of course, while valuations could soften with the earnings season underway, the elevated multiples mean that investors should be on the watch as doors seem open for some downside.

That said, the earnings season is off to a good start. Of course, tech companies have been less impacted by the pandemic and some supply-side disruptions are behind. That’s the reason why tech companies have been able to largely beat estimates.

Companies like Wipro Ltd have shown improvement in revenue growth. While Infosys Ltd has also showed a sharp uptick in growth rates. Further, HCL Technologies Ltd beat the Street’s expectations.

For the broader Nifty 50 stocks, however, revenues are expected to contract compared to last year. But sequentially should show a better growth rate of about 30-34%. Earnings before interest, tax, depreciation and amortization is expected to remain flat year-on-year. However, cost savings led margin growth in Q1 may not be much more.

The Nifty Bank index is looking up. Early bird bank results are not showing a high pandemic related stress. HDFC Bank’s Q2 gross non-performing assets have been down to 1.08% from 1.36% in Q1. Although the bank has cautioned the slowdown could lead to higher defaults, for now things are not so bad.

Some of the growth momentum of Q1 for FMCG companies is expected to sustain in Q2.

Demand for cement is also perking up showing that construction activity is rising. The second round of fiscal stimulus should be quite encouraging for infrastructure and cement companies.

Metal companies could get their mojo back, particularly steel companies. Steel prices have perked up sequentially, and that could see companies like Tata Steel rebound to profitability. Other metal companies are also expected to show sharply better profit growth sequentially.

All in all, some of the bounce back due to the re-opening of the economy is encouraging. In fact, retailing may also see a good Q2 recovery, albeit at a slower pace.

Of course, the Indian economy is not out of the woods yet. The International Monetary Fund’s grim outlook for the economy for FY21 predicts a sharp contraction in growth rates. India’s demand stimulus is underwhelming, note analysts.

The Indian markets, however, depend on steady inflows. On that count, foreign portfolio investors marginal buying in the domestic market will provide support. Domestic investors, though, seem to be on a profit-booking mode. Stocks of recently listed initial public offerings fell after clocking sharp listing gains.

While the Nifty 50 is just about 5.4% away from its pre-pandemic all-time highs in February, it will still need a great boost to reach pre-covid highs. Even so, there is enough liquidity still sloshing around.

But the markets may probably take a breather till the US elections are resolved. With a decisive mandate, another round of stimulus could be on the cards, which would be good for emerging markets. In that sense, any major dip could find investors opening their wallets a bit more.


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