Markets expected to hit new highs this week on strong macro sentiment

Week Ahead

This week, domestic equities are expected to sustain their momentum with Nifty likely to move towards 22,700-22,750. The ongoing rally is more focused toward large caps, while the broader market is expected to remain in consolidative mode. On the global economic front, Japan’s October-December GDP, United States core inflation and retail sales data along with United Kingdom GDP data will be important events for investors to watch out for.

Last week, Nifty reached new highs and crossed 22,500 for the first time, supported by strong momentum in index heavyweights. Nifty ended the week with gains of 511 points (+2.3 per cent) at 22,494 levels. Broader markets saw a recovery towards the end after being under pressure earlier and ended the week on a mixed note, with Midcap100 up 1.3 per cent and Smallcap100 down 1.7 per cent.

On the domestic front, inflows into the capital market has been robust with fresh demat accounts opened in February reaching 43.5 lakh. February marks the third consecutive month when new demat accounts consistently exceeded the 40-lakh threshold. Further, global rating agency Moody's raised India's GDP growth for calendar year 24 to 6.8 per cent from 6.1per cent earlier, which strengthened the sentiments. However, India’s service PMI easing to 60.6 in February was a dampener.

On the global front, various events and macro data kept investors on edge. Comments from Federal Reserve Chairman Jerome Powell and release of few macro data points raised hope of a rate cut this year.

Capital goods, infra and power stocks were in momentum last week as the government planned to unveil infrastructure projects worth over Rs 1 lakh crore, with the majority of the projects relating to the power sector. Also, domestic power demand grew 8 per cent in Feb to a record high of 128 billion units - supporting the momentum in power stocks. Auto stocks witnessed buying interest after the Feb monthly sales data came in better than expectations.

The primary market was in focus with three initial public offerings open for subscription and three more to debut this week. The IPO market saw a stellar debut last week with Exicom and Platinum listing at a premium of 87 per cent and 33 per cent.

India is currently enjoying the confluence of the best macro and micro tailwinds with ~7 per cent GDP growth, moderating inflation, range-bound crude prices, easing 10-year G-sec yield, stable currency, and resilient corporate earnings.

Nifty is trading at a 12-month forward price-earnings ratio of 19.5x, which is in line with its 10-year average, even as broader markets trade at expensive valuations. Hence we expect the large caps to outperform the mid and small caps in the near term. Overall, markets would take cues from economic data, announcements relating to the upcoming Lok Sabha elections and the timing and quantum of easing in the interest rate cycle, both globally and in India.

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