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FILE PHOTO: A man walks out of the Bombay Stock Exchange (BSE) building in Mumbai, India, February 28, 2020. REUTERS/Hemanshi Kamani/File Photo (REUTERS)
FILE PHOTO: A man walks out of the Bombay Stock Exchange (BSE) building in Mumbai, India, February 28, 2020. REUTERS/Hemanshi Kamani/File Photo (REUTERS)

A catch-up rally driving the bulls

  • The current optimism can be majorly attributed to the catch-up rally being played by broader markets who are trying to match their industry bellwethers

Nifty50 index managed to attain positive returns for the fifth consecutive week however, the week saw a legit struggle between large and small caps. Large caps faced profit booking and were mired down by the selling pressure from the domestic institutions, whereas small and midcaps were lapped up by retail investors. Broader indices namely mid and small caps were seen rallying 2-4% each week for 5 consecutive weeks.

The current optimism can be majorly attributed to the catch-up rally being played by broader markets who are trying to match their industry bellwethers. However, some sentimental credit for this upmove can be given to the acceptance of Pfizer-BioNTech COVID-19 vaccine by the UK government which would surely play a remarkable role in the concentrated efforts to overcome the pandemic. Hopes of a faster than expected demand recovery also led global crude prices to nearly touch their 9-month highs.

The celebration doesn’t end here India’s GST collection crossed the Rs. 1-lakh-crore-mark for the second consecutive month with consumption picking up amid the festive season after gradual easing of lockdown restrictions. Additionally, India trimmed down its heavy trade deficit to $9.96 billion from $12.75 billion earlier and managed to strike a better than expected GDP contraction of 7.5% vs a much higher contraction of 23.9% in Q1FY21 justifying an improvement mode.

India is on its path to a major economic turnaround and is comparatively well placed unlike at the start of the pandemic when it was at the bottom of every list of macros amongst other major economies. Needless to say that collective wisdom of Mr. Market was far ahead and eventually fundamentals caught up taking markets to new highs.

Event of the Week

RBI maintained its status quo stance for the third consecutive monetary policy and revised GDP numbers upwards inline with expectations. Rising inflationary tendencies have been acknowledged but little seems to have been done in that direction.

Infact, inflation is projected to cool down below 5% in H1 of FY22 which seems unlikely given the massive helicopter money by central banks across the world and run up in commodity prices such as crude and base metals. Inflation could remain elevated going forward given that import restrictions are in place to support our economy and this growth recipe could have unintended consequences of higher inflation, which will be a bigger problem to cure a few quarters down the line. However, in the near term this will support recovery in financial and capital markets alike.

Technical Outlook

Nifty 50 index closed the week on a positive note and most of the sectoral indices such as Nifty Metal and auto contributed positively. Though top index movers and several banking players have slowed down but the benchmark index continues to get support from other sectors such as Metals, Auto, Pharma and IT.

The short-term trend continues to remain bullish, however, the index is trading at rising channel resistance on the weekly chart. So traders are advised to maintain a bullish outlook but not to trade highly leveraged or aggressive bets. Sometime soon a mild dip can trigger a profit-taking move in markets. A break below 12900 can be taken as a caution signal for any short term decline.

Expectations for the Week

A sectoral rotation theme will be witnessed in the markets in the coming weeks wherein beaten down sectors pick up momentum and witness traction. In general, IT, FMCG and Pharma are in a prolonged phase of consolidation and are unlikely to witness any significant buying atleast till this year end.

On the other hand, metals especially base metals are expected to remain in favor on the back of increasing inflationary tendencies and stimulus from central banks. Keeping sectoral rotation in mind, traders can initiate long positions in media & entertainment, metals and good quality PSUs. Investors are advised to accumulate FMCG, IT and Pharma stocks in a SIP format given their consolidation is underway. Any negative news may take markets lower which would offer a buying opportunity for investors to pick up quality names. Nifty50 closed the week at 13,258.5, up by 2.2%.

*Ms. Nirali Shah, Senior Research Analyst, Samco Securities

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