Strong cues lead to buying interest in large caps

Equity markets continued with its last week momentum and hit yet another record highs making gains for the second consecutive week in a row, after breaking out of its 2-months consolidation last week.

Positive global cues (US / European markets at new highs), strong domestic macro data (3-month low CPI at 5.6 per cent and IIP growth of 13.6 per cent YoY in Jun’21), healthy results by index heavyweights and strong buying interest in large caps propelled the benchmark indices to fresh highs.

Sensex crossed the 55,000 mark for the first time – hitting a new high of 55,487 during the week before closing at 55,437 with gains of 2.1 per cent. Nifty too hit a fresh high of 16,543 and closed near life highs at 16,529, gains of 1.8 per cent.

The broader market continued with its sharp underperformance with Nifty Midcap100/Nifty Smallcap100 down 1.2 per cent and 2.2 per cent respectively.

Sector wise it was a mixed bag, with IT rallying the most – up 4.4 per cent. Financials, Energy and Infra gained 1-1.5 per cent while Private Banks and FMCG were up less than 1 per cent each.

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On the other hand, Pharma was the biggest loser, down -3.2 per cent followed by Realty and PSU Banks which tanked -2.2 per cent each. Metals, Auto and Media lost -0.7 per cent each.

FIIs remained net buyers for the second week in a row, having bought equities to the tune of Rs 60 crore (till Thursday) while DIIs were buyers to the tune of Rs 500 crore (till Thursday). Global cues were largely positive on account of lower US inflation data and better than expected UK GDP numbers.

July CPI increased 0.5 per cent for the month, matching expectations, while the core inflation rate, rose by 0.3 per cent, below expectations of a 0.4 per cent increase, thus providing some assurance to the investors that the Fed may not hasten its tapering pace. UK GDP grew by 4.8 per cent QoQ in Q2 as lockdown rules eased.

However, China’s regulatory crackdown on internet insurance companies, somewhat soured the sentiments. The Chinese government has unveiled a five-year plan outlining tighter regulation of much of its economy including national security, technology and monopolies.

On domestic front, sentiments were buoyant led by healthy earnings season, further unlocking of economy and positive economic data.

CPI-based retail inflation came in at a three-month low of 5.6 per cent YoY in Jul’21, as against 6.7 per cent YoY in Jul’20. With Jul’21 inflation data, CPI-based
inflation is likely to average around 5.5 per cent in FY22, moderately lower than 5.7 per cent YoY forecast by the RBI.

This would be within RBI’s comfort zone and hence more likely that RBI would maintain its monetary policy stance in the near term as well.

Technically, Nifty formed a strong Bullish candle on daily and weekly time frame. It has given a range breakout and if it manages to hold above 16,400 zones, we can expect the momentum to extend towards 16,700 zones while on the downside support shifts higher to 16,350- 16,250 levels.

Equity market is likely to continue with its strong positive momentum as the economic activities are expected to further pick up pace with the lockdown measures getting relaxed.

The result season is now largely over with corporate earnings being in-line to better than expectations. Going ahead, we expect corporate earnings to improve further as economy opens up and improving vaccination trends.

We estimate Nifty EPS for FY22E/FY23E at Rs 725 and Rs 862 which implies growth of 35 per cent and 19 per cent respectively.

Market has been witnessing a rotation from mid to large caps – a phenomena we believe could continue as well in the near term given the sharp outperformance of the broader market in the last 18 months.

(The author is Head- Retail Research at MOFSL)