Mumbai: Despite covid-19 severely hampering economic activity in the last three months, the April-June period saw the Indian stock markets clock their best quarterly gains since the September quarter of 2009.
The rally is largely driven by optimism of economic recovery post reopening of the country and a gush of liquidity flowing into the Indian markets, especially foreign capital.
According to a Mint analysis, Indian benchmark indices Sensex and Nifty gained nearly 20% in April-June, as against a decline of 28% and 29% in the previous quarter.
Both BSE Midcap and BSE Smallcap indices were up 24.29% and 29.68% respectively in the June quarter. Sectorally, highest gainers were BSE Auto (up 42.29%) and BSE Telecom (up 36.08%).
However, this may not be an indication that India is out of bear markets yet.
Analysts are not convinced that the rally in equities will sustain and believe that the markets are staring at uncertainties with lack of fundamental support.
According to Joseph Thomas, head of research - Emkay Wealth Management the stock market rally is led by hope and liquidity and hence may not be sustainable if the ground realities of economic activities do not improve over time.
“It may take another three months to accurately estimate the impact of the pandemic and the shutdown. And another three months to discern the positive impact of the measures taken by the government and the RBI on economic growth, demand and employment. If the numbers do not come up to the anticipated levels, which it is quite likely, it may result in disappointment and could lead to a corrective downward movement," he said.
Thomas added that uncertainty regarding the trajectory or growth, the behaviour of consumer inflation, the border conflict between China and India, the run up to the US presidential elections etc. are factors that may influence domestic markets from time to time.
Liquidity has been abundant in Indian markets in the June quarter. Foreign institutional investors (FIIs) were net buyers of Indian equities worth $3.91 billion in the three months ending 30 June. While domestic institutional investors (DIIs) have pumped in ₹10941.31 crore in Indian shares in April-June period.
Besides the risk of covid-19 spread, other key risks that may dent the current positive sentiment are failure of any larger corporate or financial institution globally or in India, abrupt cross-border or cross-asset fund flows and excessive currency volatility, said Atul Bhole, Senior Vice President – Investments, DSP Investment Managers. “The push and pull of these positive and negative news flows may keep markets in a narrow range," he said.
Corporate earnings for the June quarter are expected to be disappointing as most manufacturing and service activities were impacted due to lockdown.
“With a sharp rally of over 30% from low levels seen in March 2020, the valuations are not cheap anymore. Any further upside would be dependent on the pace of recovery as the lockdown unwinds and businesses stabilise. Thus, the markets could slip into a consolidation phase for the next few months. Brighter side is that the worst could be over in terms of the downside risk," Gaurav Dua, SVP, Head - Capital Market Strategy & Investments, Sharekhan by BNP Paribas said.
Since the lows hit in March, Sensex and Nifty have risen 35.2% each. However, markets are still nearly 17% away from record high touched in January this year. So far this year, the Sensex and Nifty are down around 15%.