Markets may take a breather

Indian equity markets gained for the second successive week, following strong global markets. Investors ignored near term growth concerns and cheered the gradual easing of the lockdown and good monsoon prediction.

Hopes of a potential COVID-19 vaccine and expectation of further stimulus announcement by the government kept the sentiments positive. Global cues too have been strong as investors shrugged off political unrest in the US and worries about US-China tensions. Strong FII inflows over past few days have also provided support to the market.

For the week, both Nifty50 and Sensex were up 5.9%/5.7% respectively to close at 10,142/34,287 respectively. Lot of action was seen in the broader market with Nifty Midcap100/ Smallcap100 outperforming the benchmarks with gains of 6.7%/10.5% respectively.

All the sectors ended in green with PSU Banks, Media and Realty being the biggest gainers, up 23%, 18% and 12% respectively. Metals, Private Banks, Oil & Gas, Auto and Infra gained in the range of 6-9% while IT, Pharma and FMCG were up 1-4%. FIIs were net buyers throughout this week having bought equities worth Rs 13,927 crores while DIIs were sellers of equities worth Rs 1,600 crores.

After a highly stringent 2-month lockdown, the Indian government is clearly moving towards a step-by-step approach to restore normalcy. While these relaxations would help improve the supply-side situation, the underlying demand trend remains the key monitorable. We expect the governments (Central and State) to progressively keep relaxing the lockdown norms further. Thus, we believe that the interplay of health and economic crisis holds the key to markets in the near term.

Further IMD has forecasted a timely onset of normal rainfall this year (102% of LPA) from June 1, which has improved the outlook for farm income and provides a boost to the rural demand.

However, market has witnessed the sharp rally over the last few days, and hence may consolidate or take a breather, before starting the next leg of rally. Even valuations have turned expensive at 21xFY21E earnings and any negative development on the global front might derail the momentum. Hence, 'Buying on Decline’ would be a better strategy over the next few weeks.

Technically, immediate hurdle for index is placed at 10300 and then 10500 zone while support exists 10000 then 9950-9890 zones.

(The writer is Head – Retail research, Motilal Oswal Financial Services Ltd)