Things looking up, but Nifty yet to take direction, may stay sideways

The domestic equity market witnessed a volatile week, especially after the WPI inflation numbers hit their 11-year high at 10.49% for April. While higher inflation raised some concerns, its near-term impact was effectively neutralised by a drop in the number of Covid-19 cases in India.

Although FPIs have been net sellers since last month, India still stands on top of the chart, among other emerging markets with the highest 12-month FPI equity inflows of over Rs 36,618 crore as of April 30, 2021. Brazil ranks second with around Rs 10,811 crore as per CLSA data. Indonesia, Taiwan, Thailand, South Korea etc. have all been seeing negative net flows.

Since April 2019, Indian market has been seeing continuous inflows from FPIs, barring a few months, which shows that while FPI outflows for a few months can cause the market to correct, at the end of the day Indian market is still strong enough to keep its head high.

With rising confidence among domestic investors about an impending recovery, the benchmark indices can continue to counter any pressure. RBI’s first tranche of G-Sec buying program further allowed room for growth in the bond market, enabling the central bank to sustain the current low rate environment, while maintaining yields in the 6-6.5% range for the 10-year bond.

While inflationary concern is playing out in the broader market, thanks to a spike in commodity prices, the earnings season has seen different themes unfold. India is amidst a demand pull scenario, which is driving earnings growth and re-rating for stocks.

Production activities have been normal in the consumer goods, durables and retail segments, but mobility issues have caused logistical constraints, and they have resulted in depleted volumes and lower realisations.

Consumption in discretionary space has seen a sharp drop, because despite liquidity, the common man still continues to focus his spending only on essentials. This spare liquidity in the hands of retail investors is being diverted towards gold, which has been gaining a lot of traction as an effective hedge against rising inflation.

While there is temporary domestic pressure on demand due to lockdowns, the trend in merchant exports has been improving strongly with a 195 per cent jump year on year and a 17% growth since April 2019.

The inventory pileup is currently being managed by exports. Going forward, investors can keep various export-oriented stocks on their radar. It would also be a good time to invest in gold from a portfolio allocation standpoint. An easier way for retail investors to invest in gold would be to lap up the current sovereign gold bonds, which have a decent interest component attached.

Event of the Week

The Covid second wave has temporarily sidetracked government’s ambitious strategic divestment plan of Rs 1.75 lakh crore for this financial year. Be it the due diligence process for Air India and BPCL stake sale or divestment of SCI and BEML or partial stake sale in LIC through an OFS, all scheduled activities have been delayed.

Despite such uncontrolled setbacks, the government managed to sell a bigger part of SUUTI’s residual stake in Axis Bank via OFS, which might garner close to Rs 4,000 crore. So, although derailed, 80-90% of the disinvestment target still looks achievable which can still save some damage on the fiscal front.

Technical Outlook

Nifty50 closed the week on a positive note and crossed the previous short term resistance of 15,050. Although the index trades very close to its all-time highs, it is still below the rising channel and has not seen any directional move to break the channel yet. Nifty needs to close decisively above 15,200 level to start a fresh bullish move within the channel. As long as it does not take a decisive direction, we maintain a sideways to mild bullish outlook.


Expectations for the Week

Indian benchmark indices are expected to continue their indecisive phase in the near term, as global macros are holding firm amid the pandemic. Adding to this, the Fed at its April meeting indicated that it would discuss scaling back the massive asset purchase program if the current recovery pace continued.

With a hint towards tapering of liquidity, bond markets continued to witness selloffs and going forward if there is lower buying support from the Fed, the impact would be clearly visible in the prices.

The turnaround being seen in the earnings can keep Dalal Street going at least for a couple of weeks more. Investors can remain on the sidelines and wait and watch till the arrival of monsoon. Nifty50 closed the week at 15,175, up 3.39 per cent.

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