Even though the Nifty managed to close above 15,000 for the week ended March 12, it couldn’t hold on to the gains made in the first three trading sessions of the week. The mild selloff on March 12 saw the Nifty lose 143.85 points. Autos, particularly Maruti, Hero MotoCorp and Bajaj Auto, were the major laggards. ITC, RIL, IndusInd Bank, UltraTech Cement, Bharti Airtel and Dr Reddy’s Labs were the major losers, while IT stocks gained.
A major sectoral rotation is now happening from pharma, which was the star performer of 2020, to IT. Big deal wins and robust order pipelines augur well for the IT industry. Prospects look good for the IT majors like Infosys, HCL Technologies, Wipro and TCS despite a smart run-up in prices.
Partly the good prospects are in the price: one-year return for Infosys and HCL Technologies are exceptional at 117 percent and 98 percent respectively. Midcaps like L&T Infotech, Mindtree, Persistent Systems, Tech Mahindra and Coforge are also looking good.
The 1.6 percent contraction in the industrial output in January and the rise in CPI inflation to 5.03 percent are concerns. But, the market is likely to be swayed by global trends, which, in turn, will be dictated by the direction of US bond yields and the Fed’s response to them.
The passage of the $ 1.9- trillion US fiscal stimulus is certainly positive news for the market. This massive fiscal stimulus, along with the unprecedented huge monetary stimulus being implemented now, will keep liquidity abundant and interest rates abysmally low. This will have further positive impact on markets, if inflation remains low. But there s a big ‘if’.
The firmness in US bond yields, still hovering around 1.53 percent, is a reflection of the market’s inflation concerns. It is possible that the combination of the ultra-loose monetary policy and the $ 1.9-trillion stimulus may trigger inflation. That is the market’s fear and concern.
If inflation remains below 2 percent and the US 10-year yield slowly inches up to say 1.65 percent to 1.7 percent by December 2021, it will not impact the market. But if inflation suddenly surges and yield spikes beyond say 1.8 percent, there will be a selloff in equity markets. The consequent correction will be global and steep. This is the biggest known threat to the market now. It is important to appreciate the fact that even in such an eventuality, IT will be an outperformer since capital outflows will depreciate the rupee, which again will be positive for IT stocks.
In the upcoming policy meet, the Federal Reserve is likely to persist with its dovish commentary and accommodative monetary stance. Also, the Fed will try to assuage inflation fears. This is likely to sustain the capital flows, keeping markets resilient.
Since the Indian economy is sharply turning around, the economy-facing sectors are likely to do well. Apart from IT, financials, cement, autos and chemicals are likely to witness renewed investor interest. The rising COVID cases in parts of the country are a concern.
(VK Vijayakumar is Chief Investment Strategist at Geojit Financial Services.)
Disclosure: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.
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