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Monday, September 20, 2021

Explained: Equity markets rising, where should you invest?

While markets are trading in unchartered territory, experts say the momentum may continue for now as it is well supported by liquidity, earnings growth and an uptick in economic activity and investor sentiment.

Written by Sandeep Singh | New Delhi |
Updated: August 7, 2021 8:54:59 am
A pedestrian looks at share prices on a digital screen outside the Bombay Stock Exchange (BSE), in Mumbai, Wednesday, Aug. 4, 2021. The BSE Sensex crossed the 54,000 mark on Wednesday. (PTI Photo: Kunal Patil)

After hovering around the 51,000 and 52,000 marks for over three months, the Sensex at the Bombay Stock Exchange finally broke out of that zone this week. Over the last four trading sessions, it has climbed 1,906 points, or 3.6%, to close at a new high of 54,492.8 on Thursday. The Nifty at the National Stock Exchange, too, crossed the 16,000 mark for the first time on Tuesday and rose further to close at 16,294 on Thursday.

While markets are trading in unchartered territory amid concerns around inflation and a possible third Covid-19 wave, experts say the momentum in the markets may continue for now as it is well supported by liquidity, earnings growth and an uptick in economic activity and investor sentiment.

Why have equity markets gone up?

After the second Covid wave and concerns over its fallout on the economy kept market sentiments under check over the last few months, a decline in cases over the last month, a pickup in vaccination pace and economic activity, and better than expected earnings growth by India Inc in the quarter ended June 2021 have now helped improve market sentiments. While high liquidity in the economy has supported this buoyancy in the market, recent data on GST collections crossing Rs 1.16 lakh crore and manufacturing Purchasing Managers’ Index (PMI) moving back above the critical 50.0 threshold in July — up from 48.1 to 55.3 — point to a rebound in activity.

Another factor that has helped the markets rise has been the participation of foreign portfolio investors. In July, while they had invested a net of only Rs 4,600 crore into Indian equities, they had pulled out a net of Rs 11,300. However, between Wednesday and Thursday this week, they have invested a net of Rs 5,563 crore. While liquidity is strong, the continuing low interest rate environment, which is likely to stay for some time, is also helping the rise. The RBI’s monetary policy statement on Friday will throw some light on this.

“Market is welcoming the sequential recovery of key high frequency indicators like manufacturing PMI, the GST collection and the Google mobility data; all are trending higher on a month-on-month basis. With the improvement in key macro data, FIIs turned buyers in the equity market v/s the net sellers in the last month. Further, the recent spate of IPOs and their success clearly indicates the appetite for mid- and small-cap stocks,” said Naveen Kulkarni, Chief Investment Officer, Axis Securities.

The indices, since May

Is the momentum likely to continue?

There is a widespread belief among market participants that it will. While there is huge liquidity in the market, which is flowing both into the secondary market and even into the primary market (into the large number of IPOs that are hitting the market), there is optimism around a revival of earnings growth following a strong performance by India Inc in the quarter ended June. There is also a sense that since the government did not impose a complete shutdown following the second wave of Covid, it is unlikely that there will be a shutdown if there is a third wave either. Thus, market participants believe that the economic activity will not be derailed. Some feel that since big lessons have been learnt from the second wave, India is much better prepared to handle a third wave (if there is one) mortality will be lower as many more people have been vaccinated now.

“The biggest strength for markets has been opening up of the economy and massive liquidity in the economy. While corporate earnings have been good, they are expected to recover over the next 12 months. Since the government did not shut the economy at the peak a second wave, market expects that even if the third wave comes, it is unlikely that there will be complete shutdown,” said Raamdeo Agrawal, chairman and co-founder, Motilal Oswal Financial Services.

“I see the momentum continuing. While fundamentals of the economy remain strong, over the last few months the collections for banks and financial services companies have been closer to normal and that has given additional comfort to the markets,” said Pankaj Pandey, head of research at ICICIdirect.com.

Is the broader market participating?

Over the last three months, mid- and small-caps rallied strongly while the Sensex lagged. However, the last four trading sessions have seen dominance by the premier index, and large companies are now leading this rally. As against a Sensex rise of 3.6% over the last four trading sessions, the mid-cap index has risen by only 0.2% and the small-cap index has in fact slipped 0.2%. In the three months between May 1 and July 30, while the Sensex had risen by 7.8%, the mid- and small-cap indices had rallied 13.7% and 23.6% respectively (See graph).

On the sectoral front, while IT companies had been trading strong, companies in banking and financial services have done well over the last few days. Experts say that with NPAs not emerging as a big concern over the last few quarters, banks and financial services companies are expected to do well going forward.

While the Sensex has led the rally, market experts feel there are opportunities across market capitalisations and sectors.

Where should you invest?

When the market is down and even blue chips are available at attractive valuation, retail investors can invest in a fundamentally strong company and will see good returns over a period of time. However, when the markets are trading at all-time high levels and every company seems to be commanding a premium valuation, it is tough to identify the future winner even among the large-cap companies. The risks are far higher in smaller companies. In fact, retail investors should put most of their equity investment through mutual funds that allocate money to large-, mid- and small-cap funds following the asset allocation principle.

“If one can’t do the homework, then mutual fund is the best way to invest. However, if an investor can do some research, he can do direct investment too. The economy structurally looks positive and one can focus on simple known businesses with low leverage. While IT and chemicals and pharma look good structurally, investors can also look at some good companies in logistics and other growth sectors in the mid- and small-cap space for investment,” said Pandey. He cautioned that investors should not borrow to invest in equity markets.

While there are a number of IPOs lined up to raise funds from the market, experts say investors must carefully study the company and its business, and do a peer review and valuation study before investing in them.

While markets are rising and a number of small-cap companies may hit the upper circuit, experts caution against chasing such companies. “One must be careful of tip-based investing, which gets prevalent in any bull market. Retail investors should only go with fundamentally strong companies,” said the CEO of a financial services firm.

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