Market to trade in a narrow negative range but will gain strength after COVID cases peak

Market to trade in a narrow negative range but will gain strength after COVID cases peak
May 03
02:02 2021

The Nifty has had good last six trading sessions, climbing back to 15,000, a monthly high, barring April 30. During this rally, the best-performing sectors were metals, pharma, chemicals and banks with mid and smallcaps also doing well.

The Indian market is trading in a narrow and negative channel for the last two and a half months. A surge in COVID-19 has hit economic activities. This channel is of about 750 to 850 points. On April 22, the Nifty was at the lower end of the range and on April 29, it was at the upper end. We bounced from the lower base due to a drop in COVID-19 cases in key areas like Mumbai, triggering hope that India’s infections were reaching its peak. At the same time, the global market was pleasant and monthly expiry triggered short-covering.

But on April 30, selling was seen at the top end of the channel and the narrow range still persists. The main reason is the prevailing concern over lockdown as daily cases continue to be high though at a slower rate. News of factory shutdowns has hit market sentiment. May

month F&O settlement has not generated enough positions due to the weekend, uncertainties over the vaccination drive and assembly election results. The election outcome is not expected to have any implication for the market and economy. A selloff in the banking sector was in following weak numbers announced by some mid banks and NBFCs due to weakening NPAs and higher provisioning.

COVID is the main reason for the underperformance of the Indian market against the rest of the world. On a long-term basis, India is among the best performer but in the last three months, we have lost the gains. In Asian emerging markets, the Taiwan index is the best performer with Hong Kong’s Hang Sang index as the weakest. Overall, Asian markets underperformed the world market, while the US was the best performer.

The US is supported by the best and largest-ever fiscal and monetary policies. About 30 percent of the country’s population is fully vaccinated and 45 percent has got the first shot. Daily cases are at 1/5th of the January 2021 peak. As a result, the US dollar is strengthening against other currencies. This is supported by high-interest return, higher than dividend yield of S&P500 index. The US government’s 10-year treaury bill yield is at 1.65 percent, better than higher risk dividend yield of S&P500 index at 1.37 percent.

In India, Q4 results have begun to come in. Only a few companies, mainly from IT and banking sector, have shared their numbers, so far. IT has largely met expectations while also maintaining the outlook. Banks have thrown up a mixed set of numbers, with most meeting expectations but outlook for the quality of assets has declined. The results of consumer goods companies are a tad below expectations. On a quarterly basis, results are marginally below expectation till date.

For India’s performance to improve, COVID-19 cases have to fall and the vaccination drive has to pick pace. We can expect a peak in May-June. Most of the results will be released in May and are expected to be good, which can help the market regain lost ground. On a long-term basis, this is supported by an optimistic monetary policy and fiscal reforms in India as well as abroad. Earnings growth will revamp in 2021 and 2022 after a drop in COVID cases and a rising economy supported by export opportunities.

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