Market to remain volatile in short term but long-term prospects bright, say experts

After opening lower, Indian equity benchmarks the Sensex and the Nifty moved higher, supported by gains in select heavyweights, including Kotak Mahindra Bank, Asian Paints, Bajaj Finance, Larsen & Toubro and Nestle.

After falling nearly 170 points, the Sensex rose by equal points, swinging about 340 points in the first two hours of trade. The Nifty slipped below 11,750 only to jump above 11,800 in the same timeframe.

The market, of late, has been experiencing strong bouts of volatility and is struggling to cross the crucial resistance levels in the absence of fresh positive triggers.

The US elections, rising coronavirus cases in America and Europe and a delay in the second US stimulus package have left investors wary. Hit hard by the second coronavirus wave, many European nations have reinforced lockdown.

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While volatility is expected to rise in the near-term, analysts are of the view that the market is still attractive for the medium and long-term.

“Medium and long-term outlook on the market is constructive. We believe markets could gain 13-15 percent CAGR over the next three years on the back of similar growth in earnings. We expect real estate to lead the investment cycle revival even as the government maintains its annual spending,” said Nirav Sheth, Chief Executive Officer, Emkay Institutional Equities.

Sheth is bullish on financial services, automobiles, pharma and real estate and said that there are pockets of over-valuations in some sectors like consumers but not necessarily stretched.

“Extremely depressed valuations, especially in PSU set up are more surprising. Some PSU stocks (with no risk to going-concern assumption) are yielding 8-12 percent in dividends against the risk-free rate of 6 percent,” Sheth said.

Some consolidation in the market is on expected lines after a strong rally since March lows.

The US presidential election is at the beginning of November and its outcome will have a bearing on global markets, including India.

“In the short term, a favorable outcome of the US presidential elections and passage of the second US stimulus bill will be positive for the markets and could push it to all-time highs. However, the adverse outcome of the US elections or failure of US Congress to pass the second stimulus bill could lead to increased volatility in the markets,” said Jyoti Roy- DVP- Equity Strategist, Angel Broking.

Roy is also positive on the markets from a medium-term perspective but he stressed on the need to be aware of the risks that can lead to increased volatility.

“The key risks which can derail the recovery rally are: 1) surge in infections as the economy is opened up further 2) delay in vaccine production as compared to timelines expected by markets 3) failure of the US government to pass the second stimulus bill leading to volatility in global markets, and 4) adverse outcome of the US presidential elections,” Roy said.

Roy said he had been positive on the FMCG theme since the beginning of the pandemic but now valuations were stretched for most companies, which could lead to underperformance in the sector, especially in the case of a risk-on rally.

He expects rural, essential and digital themes to continue playing out over the next few quarters, given revenue visibility and strong growth prospects.

“We continue to maintain our positive outlook on sectors like agrochemicals, IT, two-wheelers, tractors and pharmaceuticals. We also expect the rally in cyclical and beaten-down sectors to continue for some more time given the continued improvement in the economy. Within the recovery theme, we believe that sectors like low ticket consumer durables, cement, and multiplexes should do well,” Roy said.