Covid to keep markets flat; Upside of 3% likely in Q1FY22

Indian capital markets are likely to witness a marginal upward trend in the next few months. Due to the second wave of the Covid-19 pandemic, capital markets in India have shed a lot of what was gained in one year.

After touching a high of 52,000 in February this year, the Sensex has dropped over 5 per cent to 49,206.47 levels.

The Nifty, on the other hand, is now trading at 14,823.15 level after going over 15,000, which is a fall of around 1 per cent.

About a dozen brokerages and analysts DH spoke to feel there is a downward sloping trend with no major upside in the next two to three months. On average, these analysts believe that the upside, if any, could be about 3 per cent in the coming few months.

On the contrary, chances of a national lockdown could trigger markets to fall further. “We may not see a panic reaction in the markets as was seen around the same time last year,” says Narendra Solanki, Head- Equity Research (Fundamental), Anand Rathi Shares & Stock Brokers. “However, some minor downside can’t be ruled out in very short-term depending on the outcome of events like national lockdown announced by central Govt. etc. along with peak new cases numbers, etc.”

Read | Indian markets may remain range-bound in the absence of fresh trigger

Analysts are of the opinion that while Covid-related business disruptions can be managed in the short-term, a major concern would be if the vaccination drive does not work out. S Hariharan, Head - Sales Trading, Emkay Global Financial Services Ltd feels that if the vaccination drive runs into logistical challenges and lockdowns in Tier-2 & Tier-3 cities start getting prolonged, then a significant hit to the financial system can be expected.

While most analysts feel that state elections wouldn’t have an impact on the capital markets, some like Binod Modi from Reliance Securities feel that the results of the recent state elections could be seen as the emergence of strong opposition from regional parties against the NDA government.

“This may impact the NDA’s priority to spur economic growth,” says Modi.

All analysts feel that Covid is a key variable in the way of the markets. However, some of the other key factors that could affect market trends are FPI flows, the dollar index, bond yields, and inflation.

“Consistent rise in commodity prices for a longer period of time could impact the profitability of the manufacturing sector which could have a negative impact on earnings and market,” says Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities.

Even as these analysts say that the broader markets would be flat in the coming few months, they feel the pharma, chemicals, and IT sectors will go on to do well. They are divided on FMCG which most feel will do well. However, some feel they could underperform. Ajit Mishra, VP Research at Religare feels FMCG could underperform due to expensive valuation.

“We expect FMCG to underperform due to expensive valuations. Further, we are not witnessing the kind of panic buying which we saw in the first lockdown. Additionally, rising cost pressures would limit the margin expansion,” says Mishra.

Though experts opine that the markets are going to be flat in the coming months, they say investors should use dips to buy stocks.

“While the index has corrected a modest 6 per cent from its recent highs, many stocks have undergone a chunky 15-20 per cent decline,” says Hemang Jani from Motilal Oswal Financial Services Limited.

“We believe this correction is a buying opportunity and it doesn’t change the medium-term thesis of recovery in corporate earnings which would be led by underlying macro pick-up with focus on investment cycle. We are positive on IT, Metals, and Pharma.”

For the investor, it is suggested that they weigh all uncertainties while investing.

“The lockdowns will curb economic activity and delay the recovery in the corporate earnings. Asset quality will come under question and the fiscal situation will take longer to be repaired. All these factors are being considered by the investors - both local and foreign and some of them have chosen to lighten their positions in view of so many uncertainties,” says Deepak Jasani, Head of Retail Research, HDFC securities.