Benchmark Indices Scale New Peak; End in Red Ahead of Muharram

The large-caps are playing a catch-up rally in the month of August, driving the benchmark indices to higher levels, so much so that leading Indian benchmarks the Nifty and the Sensex scaled new peaks of 16,700 and 56K respectively during opening trades.

 

However, profit-booking at higher levels and a trading holiday on Thursday compelled them to liquidate their long positions. The day saw the benchmark indices ending in red. Nifty shed 45.75 points to end at 16568.85, while Sensex was down by 162.78 points to close at 55,629.49 on Wednesday.

 

It is interesting to note that the Sensex has multiplied 560 times since its inception in 1979.  By averaging around 15 per cent CAGR during the last 42 years, the Sensex has rewarded long-term investors handsomely.

 

The current uptrend is mainly due to pent-up demand, post-reopening of the economy, while the high margins for the last several quarters helped the companies to deleverage their balance sheets.

 

Vinod Nair, Head of Research at Geojit Financial Services, said “We expect efforts from China to impose restrictions on domestic production will provide impetus to sustain the current cycle.”

 

The broader market is in a consolidation zone. Mid-caps and small caps have seen a sharp rally in the last few months and now some profit-booking is visible in the space, which is a healthy sign for the market.

Investors are now finding comfort in the large-cap space which provides more margin of safety over the broader market at current levels.

Naveen Kulkarni, CIO, Axis Securities, expects the broader market to continue doing well, so any dips should be utilised to build positions in quality stocks where the earnings visibility and the balance sheet strength is very high. Returns from current levels will be more calibrated, and focus on quality and value will yield sustainable returns.

However, the journey of the market has been volatile with sharp ups and downs unnerving the short-term investors and traders. The future will be no different. The present bull run primarily driven by the new retail investors is in an overbought, richly valued zone.

This year, the metal index has been the outperformer, with Nifty Metal Index leading with 76 per cent returns followed by the Nifty IT Index with 38 per cent returns. The metal sector, which had seen a rebound towards the end of July this year, has since seen some flattening. It has been the strongest performer since the Covid-low in March last year with a rebound of 290 per cent, followed by small-cap (213 per cent) and technology (200 per cent).

Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services said, “But it is important to remember that even sectors with good earnings visibility, like IT and metals, are highly valued. Therefore, even while remaining invested in this bull market, investors have to be cautious while committing to fresh funds.”

However, Dhananjay Sinha, MD & Chief – Strategist, JM Financial Institutional Securities, has pointed out that the recent rally is not broad-based and lacks conviction. He says, “The markets have shown some buoyancy since the beginning of August this year, rising by 4.6 per cent, primarily led by the technology pack which has continued to outperform, rising by a huge 8.5 per cent. The strength seen in consumers and banking stocks recently has been modest. Cyclical sectors such as reality, metals, mid-cap, small cap indices and high beta sectors have seen corrections or underperformance.”

The truncated nature of market performance reinforces the point that pure liquidity-driven rallies and multiple expansions are probably behind us. Global inflections including rising evidence of peaking global growth, evident now in China and US, US tapering - the stance of US central banks and correction in commodity price bubbles will define the market conditions going forward, he opined.

High inflation permeating into most countries, especially developed markets, has also significantly contributed by persistence of supply chain disruptions, which have compounded the impact of post-pandemic demand recovery. “While the common belief is that the disruption will linger for a long time, our view is that we will see evidence of improvement in the coming months, running up to the end of 2021. This, in our view, should result in correction in commodity prices; thus, providing support to export oriented and resource intensive manufacturing sectors, especially in the consumption space,” he concluded.