Equity benchmarks, Sensex and Nifty, hit record high for the second consecutive day on November 10 as market sentiment remained upbeat on reports of progress in the development of a coronavirus vaccine.
Indices rose in sync with global peers as most Asian markets jumped higher as investors cheered progress in the development of a coronavirus vaccine which boosted confidence for global economic recovery.
While factors, such as better quarterly earnings, hopes of faster economic recovery, ample liquidity and Joe Biden’s victory have boosted market sentiment, a careful perusal of data shows that the rally has not been uniform since January 2020.
While sectors such as pharma, IT and energy have gained strongly since January 2020, sectors like bank, finance, metal and realty are still behind their January numbers.
“Market recovery after a sharp fall in March 2020 was mostly driven by stocks or sectors, which were least impacted by the pandemic and had better earnings visibility compared to others. Hence, sectors like IT, pharma, telecom, consumer staples, agrochem and specialty chemicals witnessed sharp upmove and supported the market rally,” said Binod Modi, Head Strategy at Reliance Securities.
After the spread of the pandemic, all economy-driven sectors got impacted due to lockdowns and rising cases of Covid. In this phase the pharmaceutical industry got a boost on account of higher exports, IT outsourcing work and deal wins went up and Reliance fared well because of the series of placements and deleveraging of balance sheet.
“After the gradual lifting of lockdowns most lead indicators have shown improvement and activity on the ground has picked up smartly. If we glance through Q1 & Q2 results of FY21 then the defensive sectors like healthcare, IT and FMCG have delivered a decent set of numbers when other sectors have reported a sharp YoY decline. The Rally in the US markets has also been led by big tech pharma and telecom, which has got replicated in most markets,” said Rusmik Oza, Executive Vice President (Head of Fundamental Research-PCG), Kotak Securities.
Will the rally sustain and more sectors participate now?
Modi of Reliance Securities believes improved sentiments with regards to the possibility of stronger liquidity and better Q2 corporate earnings are likely to persist in the near-term.
“Visible improvement in key economic indicators and possibility of India’s GDP turning to growth phase in the second half of FY21 are likely to result in more sectors to participate in market rally hereon as we are already witnessing sharp rally from financials,” said Modi.
“However, current valuations of market look to be quite stretched and market factors in a robust above 30 percent earnings growth in 2021, which will be quite challenging given the muted expectations from a sharp revival in government and private CAPEX,” Modi added.
Experts point out that in terms of the business impact we have seen the worst in the last two quarters and going forward we should see sequential recovery in GDP and revenue growth of most economy-driven sectors.
“The labour issue is also getting addressed as migrant workers are returning back from their home towns. Now, when most European nations are going in for fresh lockdowns, the Indian economy is recovering very fast and returning to normalcy. India has a chance to come out stronger and report healthy growth in CY21, provided we don’t see a big second wave of Covid cases,” Oza of Kotak Securities said.
Oza said he is not sure about whether the rally will continue in the near future as flows are strong on one side and valuations look stretched on the other side.
“If Nifty breaks the previous peak of 12,430 and sustains above that on a weekly closing basis then the rally could get extended to nearly 12,900-13,000 levels. If Nifty makes a double top and comes off then we can expect 500-1,000 points correction,” Oza said.
“Post US elections expectation is the dollar should remain weak which will aid flows into emerging markets. Higher flows could keep valuations at elevated levels. Going forward we expect economy-driven sectors to participate in the rally,” Oza added.
On the other hand, Jyoti Roy – DVP- Equity Strategist, Angel Broking thinks that the rally will sustain for some time to come especially post the result of the US elections as the focus now would shift to the second US stimulus package.
“It is expected that the Democrats will try and reach an agreement with the senate republicans in order to expedite the bill. We believe that with the Senate likely to remain in control, of the republicans the probability of a hike is US corporate tax has also reduced which is providing tailwinds to the markets,” Roy said.
“Given the backdrop, we are seeing the rally getting broader with greater participation by cyclical sectors like auto, cement and banking in the current leg of the rally. We expect the rally in cyclical and BFSI sector to continue for some time to come,” Roy added.
Which sectors will take the lead?
Modi of Reliance Securities underscored at the moment financials are leading the rally led by improving outlook of banks and financials in terms of better collection efficiencies and steady asset quality.
“In our view, IT, auto, financials and pharma space should continue to drive markets,” Modi said.
Oza of Kotak Securities is of the view that this calendar year belonged to defensives.
“As we advance towards getting the vaccine (say by the middle of next year) and the economy gets back to normalcy, we can expect the economy driven sectors to outperform the defensives in CY21,” he said.
“Banks, NBFCs, automobiles, oil & gas, telecom, utilities, capital goods, cement and metals could come into focus in CY21. The potential upside in most of these sectors based on our one-year price targets ranges between 20 & 38 percent (Vs single mid-single-digit potential upside in Nifty),” Oza added.
Roy of Angel Broking expects the cyclical sectors like auto and consumer durables along with BFSI will continue to lead the current leg of the rally especially post the significant underperformance in CY2020.
Sectors like chemicals, IT and pharmaceuticals will also continue doing well given strong growth dynamics and revenue visibility, Roy said.
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