New highs possible but spike in US bond yields could put pressure on largecaps, says Jyoti Roy of Angel Broking

Market Outlook

Jyoti Roy, DVP, Equity Strategist, Angel Broking, thinks that the volatility in the market is temporary as long as there is no spike in the short-term yields. The volatility, however, offers a chance to buy for a medium to long-term perspective.

Roy, who has more than 10 years of experience in the capital markets, thinks that largecaps may come under pressure if there is a surge US bond yields, given the very high levels of foreign institutional investor (FII) holdings. In an interview to Moneycontrol’s Kshitij Anand, Roy says he expects mid and small-caps to do better, as FII holdings in the space is relatively lower. Edited excerpts:

After the initial selloff, the bulls managed to regain control and pushed the Sensex and the Nifty above crucial levels. What led to the price action?

The recovery in Indian equities was largely driven by positive global sentiments as the third US 1.9-trillion stimulus bill made in through Congress and was signed by the US president.

While the development on the US stimulus package was positive for the markets, we believe that there are still concerns over the rising US 10-year bond yields that may cause some short-term volatility in the markets.

However, as long as we do not see any major spike in the short-term yields, any volatility will be temporary and will provide an opportunity to buy into the markets from a medium to long-term perspective.

Small and midcaps performed in line with benchmark indices in the week gone by. Where are pockets of opportunities in this space?

Small & midcaps have performed in line with the benchmark indices during the week post the sharp outperformance in prior weeks.

Going forward, we believe that mid and small caps should outperform the benchmark Nifty, as we may witness a slowdown in FPI flows in case there is any major surge in the US 10-year bond yield.

In that case, we may see largecaps come under some pressure, given very high levels of FII holdings, though we expect mid and small-caps to fare better given relatively lower FII holdings.

In the mid and small-cap space, we see good opportunities in the midsized banks like Federal Bank and IDFC First Bank along with NBFCs like M&M Finance, L&T Finance.

Asset quality stress for the BFSI sector is likely to be lower than initial expectations which should lead to significant rerating for the sector.

Moreover, we are also positive on sectors like cement, Iifrastructure, and building materials, which are expected to be big beneficiaries of the government’s thrust on infrastructure and housing.

Q) Wall Street hit a fresh record high recently, do you think the NIfty will go past 15,431 to a new record high?

A) As pointed earlier Wall Street hit an all-time high due to the $ 1.9 trillion stimulus package. However, we expect the global markets to be volatile in the near-term due to a continued spike in the US 10-year bond yields.

Rising US bond yields are likely to lead to a temporary pullback in global liquidity, (which) is expected to put some pressure on emerging markets including India in the near term.

However, we continue to remain positive on the markets from a medium to long-term perspective and expect new highs for the benchmark Nifty and the Sensex despite any near-term volatility.

Q) Sectorally, which sector hogged the limelight in the week gone by and why?

A) IT sector has been one of the big outperformers in the past week post a month-long consolidation period. This is due to the rotation of money from the high-beta sector like BFSI and infrastructure back into defensives like IT.

Post the Union budget, there had been a shift in allocation to the high-beta sectors from defensives like IT and pharma.

Post the underperformance by the IT sector in February, we are witnessing some shift in allocation back to the IT space, given a very strong demand environment and continued growth visibility for the sector.

Q) Equity MFs continue to see outflows despite a vibrant stock market. Are investors booking profits or rebalancing their portfolio towards under-owned sectors?

A) We believe that continued outflows from mutual funds is a function of investors booking profits as well as investors rebalancing their portfolios towards under-owned sectors through direct participation in equity markets.

While we are seeing continued outflows from mutual funds, SIP flows are unaffected, which signals continued participation by retail investors.

With the economy continuing to normalise rapidly, we believe that it is just a matter of time before we start seeing inflows in mutual funds.

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