Sensex continues touching new highs, begins trading above 52,450; Kotak Bank and ONGC top gainers; is the market rally overdone, are we up for deep corrections?

The BSE Sensex and the NSE Nifty have been setting new records, the domestic market on Tuesday morning began trading with gains. S&P BSE Sensex was above 52,400, while the NSE Nifty breached 15,400 for the first time even in its history. 

The momentum in the stock market has unleashed a positive, an indication that many feel means that we are back in the game after a brief rest owing to the Covid -19 pandemics. 

Kotak Mahindra Bank, IndusInd Bank, and ONGC were among the top gainers on Sensex, Axis Bank, Bajaj Finance, and Bajaj Finserv were in the red, though. 

The Indian stock markets are also set to witness the third Real Estate Investment Trust’s listing on the bourses. 

Brookfield India REIT begins its trading today, the Rs. 3800 crore public issue that closed with 7.94 times subscription earlier this month will begin trading today. Analysts are expecting a premium listing of the REIT after units were sold at a price band of Rs. 274 -275 apiece.

Stock Market Review, January 2021

The Indian stock market has, since the beginning of the year, shown buoyancy toward the prevailing market conditions even as the Covid -19 pandemics, although it has slowed in India, continues to wreak havoc in the western countries.

So what has lead to the new highs of the stock market in India?

Low-interest rates globally and optimism around the Covid -19 vaccine have positively impacted the Indian stock markets. And the Pro expansionary budget has provided a decent ground for valuation as the investors anticipate earnings growth to follow the government investments. These factors have contributed to the new highs of the Nifty. 

If we compare from last year’s levels – for the year ending January 2021, Nifty closed at 13, 634 which is around 14 % higher as compared to the previous year. In the last 3 years, Nifty has been 23% translating to a 7% CAGR.

The total 14% return last year, four stocks HDFC Bank (1.43%), Infosys (3.43%), Reliance Ind (2.81%), and TCS ( 2.2%), were the maximum contributors with 10% coming from these four stocks alone.

What has lifted the stock markets?

The recent rally is led by cyclical stocks that had not been performing due to the Covid -19 pandemics’ uncertainty on economic recovery. 

Another factor that has contributed is the unabated FII inflows that have continued into the emerging markets and are leading new highs for the Nifty. 

The Pro expansionary budget announced in Feb 2021 has further lifted the mood and rally in the cyclical and infrastructure sector as they are set to benefit from the government’s focus on investments. 

Individual stocks that report good results will continue to perform well in line with earnings. 

What is the outlook for the Stock Market?

Even though the economic indicator does not show full recovery in all sectors, a lot of liquidity helped the beaten–down stocks rally.

The opportunities in infrastructure, building material, export-oriented chemicals, PSUs, and import substitute ideas will likely rise. 

Investments in companies that are 

• Coming out of sector consolidation/debt reduction, 
• Introducing new products
• Commissioning new capacities
• Executing orders in hands 
• Export-oriented companies as economic recovery are better in the western countries

Should be the considerations one should look into while investing.

What are the Risks for the recovery of the Indian Economy?

• The Indian economy has been struggling as the GDP data saw two – quarters of a year on year decline. However, the recent quarter was better as compared to the previous quarter with a 7.5% versus the previous quarter decline of 23%.

• The fall in the number of Covid -19 cases and the fear of the second wave receding has had a significant positive impact on the Indian markets. However, the uncertainty still remains as there are indications of the virus picking up speed in several parts of the country. 

• Cement and Steel’s demand has picked up along with power; this is a good indication that industrial activity is picking up. Electricity consumption has been steadily growing since Oct 2020 and last month was higher than the previous year. However, this could also be as several industries are coming back to full functionality as lockdown restrictions have been lifted. 

• Auto sales have also shown a rise, even as vehicle registrations have fallen in Jan 2021. The disruption in the semiconductors may affect Auto sales; however, it is not an indication of or reflects any insight into economic recovery. 

• The rising oil prices are the most important factor as the oil-producing companies have curtailed supply, which has led to a massive increase in oil prices. Inflation from rising commodity and oil prices can spark fear in the economic recovery.  

• The fiscal deficit in FY21 and FY22 is also likely to be elevated versus the long-term range, which can lead to a sharp rise in the bond yield affecting equity and bond prices.

Global Economy

The western countries, as compared to India, have had it rough when it comes to the fatalities and the vulnerability to the second wave of Covid -19 primarily due to the aging population. This has led to lockdown restrictions again in countries like Germany, France, the UK, and some US states. This could pose a severe impact on the economies of these western countries. 

The central banks have been keeping liquidity high, which has lowered the interest rate for government bonds and corporate bonds.  

The return in the positive in the US markets has led to speculative fervor in the US markets even as cryptocurrencies have gained significant momentum; the increase in trading activity has lead to a rise in leverage and higher trading volume. 

However, there is a risk of synchronous global market correction at some point.

Is the Indian market rally over? Are we in for deep correction?

As compared to the US, the Indian markets haven’t done much in the last five years to fear prolonged correction. 

The Indian markets have been in a downcycle for the last 5 – 8 years and still have below-average corporate profits. Hence even if the Indian markets move in tandem with the global markets, and correct, all markets move together in the short term; however, there are chances Indian markets will recover faster. 

Also, the pro-business outlook of the government has further put a floor to the valuation. 

However, holding on to stocks is prudent as there is not much clarity as to whether we are amidst the 2003 -4 or 2007 market rally. 

If we look at 2003 -4, the past 5- 7 years returns have been low, valuations of economy-sensitive stocks were down. 

In 2007 – 08, valuations were high, and the returns were good, but so was the risk.

If we were to compare the expansionary budget outlook, the current market positioning resembles 2003 more than 2007.

Hence, it is advisable to stay invested rather than exiting or delaying fresh addition. One can look at equity investment with long term savings such that short term events are irrelevant. 

Investing in Gold Fund/ Gold ( up to 5-10% of the portfolio) as a hedge from contagion risk is advisable. 

The BSE Sensex and the NSE Nifty have been setting new records, the domestic market on Tuesday morning began trading with gains. S&P BSE Sensex was above 52,400, while the NSE Nifty breached 15,400 for the first time even in its history. 

The momentum in the stock market has unleashed a positive, an indication that many feel means that we are back in the game after a brief rest owing to the Covid -19 pandemics. 

Kotak Mahindra Bank, IndusInd Bank, and ONGC were among the top gainers on Sensex, Axis Bank, Bajaj Finance, and Bajaj Finserv were in the red, though. 

The Indian stock markets are also set to witness the third Real Estate Investment Trust’s listing on the bourses. 

Brookfield India REIT begins its trading today, the Rs. 3800 crore public issue that closed with 7.94 times subscription earlier this month will begin trading today. Analysts are expecting a premium listing of the REIT after units were sold at a price band of Rs. 274 -275 apiece.

Stock Market Review, January 2021

The Indian stock market has, since the beginning of the year, shown buoyancy toward the prevailing market conditions even as the Covid -19 pandemics, although it has slowed in India, continues to wreak havoc in the western countries.

So what has lead to the new highs of the stock market in India?

Low-interest rates globally and optimism around the Covid -19 vaccine have positively impacted the Indian stock markets. And the Pro expansionary budget has provided a decent ground for valuation as the investors anticipate earnings growth to follow the government investments. These factors have contributed to the new highs of the Nifty. 

If we compare from last year’s levels – for the year ending January 2021, Nifty closed at 13, 634 which is around 14 % higher as compared to the previous year. In the last 3 years, Nifty has been 23% translating to a 7% CAGR.

The total 14% return last year, four stocks HDFC Bank (1.43%), Infosys (3.43%), Reliance Ind (2.81%), and TCS ( 2.2%), were the maximum contributors with 10% coming from these four stocks alone.

What has lifted the stock markets?

The recent rally is led by cyclical stocks that had not been performing due to the Covid -19 pandemics’ uncertainty on economic recovery. 

Another factor that has contributed is the unabated FII inflows that have continued into the emerging markets and are leading new highs for the Nifty. 

The Pro expansionary budget announced in Feb 2021 has further lifted the mood and rally in the cyclical and infrastructure sector as they are set to benefit from the government’s focus on investments. 

Individual stocks that report good results will continue to perform well in line with earnings. 

What is the outlook for the Stock Market?

Even though the economic indicator does not show full recovery in all sectors, a lot of liquidity helped the beaten–down stocks rally.

The opportunities in infrastructure, building material, export-oriented chemicals, PSUs, and import substitute ideas will likely rise. 

Investments in companies that are 

• Coming out of sector consolidation/debt reduction, 
• Introducing new products
• Commissioning new capacities
• Executing orders in hands 
• Export-oriented companies as economic recovery are better in the western countries

Should be the considerations one should look into while investing.

What are the Risks for the recovery of the Indian Economy?

• The Indian economy has been struggling as the GDP data saw two – quarters of a year on year decline. However, the recent quarter was better as compared to the previous quarter with a 7.5% versus the previous quarter decline of 23%.

• The fall in the number of Covid -19 cases and the fear of the second wave receding has had a significant positive impact on the Indian markets. However, the uncertainty still remains as there are indications of the virus picking up speed in several parts of the country. 

• Cement and Steel’s demand has picked up along with power; this is a good indication that industrial activity is picking up. Electricity consumption has been steadily growing since Oct 2020 and last month was higher than the previous year. However, this could also be as several industries are coming back to full functionality as lockdown restrictions have been lifted. 

• Auto sales have also shown a rise, even as vehicle registrations have fallen in Jan 2021. The disruption in the semiconductors may affect Auto sales; however, it is not an indication of or reflects any insight into economic recovery. 

• The rising oil prices are the most important factor as the oil-producing companies have curtailed supply, which has led to a massive increase in oil prices. Inflation from rising commodity and oil prices can spark fear in the economic recovery.  

• The fiscal deficit in FY21 and FY22 is also likely to be elevated versus the long-term range, which can lead to a sharp rise in the bond yield affecting equity and bond prices.

Global Economy

The western countries, as compared to India, have had it rough when it comes to the fatalities and the vulnerability to the second wave of Covid -19 primarily due to the aging population. This has led to lockdown restrictions again in countries like Germany, France, the UK, and some US states. This could pose a severe impact on the economies of these western countries. 

The central banks have been keeping liquidity high, which has lowered the interest rate for government bonds and corporate bonds.  

The return in the positive in the US markets has led to speculative fervor in the US markets even as cryptocurrencies have gained significant momentum; the increase in trading activity has lead to a rise in leverage and higher trading volume. 

However, there is a risk of synchronous global market correction at some point.

Is the Indian market rally over? Are we in for deep correction?

As compared to the US, the Indian markets haven’t done much in the last five years to fear prolonged correction. 

The Indian markets have been in a downcycle for the last 5 – 8 years and still have below-average corporate profits. Hence even if the Indian markets move in tandem with the global markets, and correct, all markets move together in the short term; however, there are chances Indian markets will recover faster. 

Also, the pro-business outlook of the government has further put a floor to the valuation. 

However, holding on to stocks is prudent as there is not much clarity as to whether we are amidst the 2003 -4 or 2007 market rally. 

If we look at 2003 -4, the past 5- 7 years returns have been low, valuations of economy-sensitive stocks were down. 

In 2007 – 08, valuations were high, and the returns were good, but so was the risk.

If we were to compare the expansionary budget outlook, the current market positioning resembles 2003 more than 2007.

Hence, it is advisable to stay invested rather than exiting or delaying fresh addition. One can look at equity investment with long term savings such that short term events are irrelevant. 

Investing in Gold Fund/ Gold ( up to 5-10% of the portfolio) as a hedge from contagion risk is advisable.