Risk to domestic market may rise due to high valuation, possible slowdown, high domestic inflation, hidden NPAs
The US job data announced last weekend showed significant slippage than forecasted
Last week, the domestic market closed well after the initial weakness amidst rising COVID-19 cases, mainly due to a supportive global market. Ease in restrictions in the US & Europe and upbeat international metals prices led the rally. High demand, huge fiscal expenditure plans and supply constraints took metals prices to new highs. On the same note, this week started with optimism, mirroring strong buys in metals, auto and pharma stocks.
But, the US job data announced last weekend showed significant slippage than forecasted, signaling sluggish momentum in the labour market while cyber-attack hiked oil prices, triggering fall in global market. Rising metals prices, like international steel & copper prices at new record high, instilled fear in the world market of high future inflation & increase in FED rate.
Global markets are retreating in anticipation of interest rate hikes and overheating in the market & commodity. During this fall, the technology sector is the most impacted being the best beneficiary from pandemic followed by heavy commodity stocks. In the similar fashion, Indian market started to correct with heavy losses in IT, Banks and lately in metal stocks. The sector which outperformed this week is PSE due to divestment plans and value buying in Consumption and Pharma.
The Indian indices continued to extend its losses during the week due to concerns that a hike in world inflation will slow down domestic economic recovery and accelerate selling by FIIs, which is already under pressure due to lockdowns. The forecast on India’s GDP growth, which had a high range of 11 percent to 13 percent for FY21, are being continuously downgraded, due to increasing COVID-19 cases and extended lockdowns. If the world inflation risk increases we can expect further downgrade in GDP.
International commodity prices will have to stabilize, to provide a sustenance in the equity market. Correction has started, as seen this week, but early to state that it will continue and it is overheated only by liquidity poured by governments & central banks. Indian market has been consolidating in the last 3-month due to COVID-19 issue.
It was expected that as soon as we reach the peak infection level, the current estimate is that the bell curve will reduce from May-end to June, the market will reverse positively. But, this global inflation risk & fall in commodities is a new jolt for the domestic market. The extended lockdown & global slowdown will have a heavy impact on domestic corporate revenue. We are at risk of further downside in the corporate earnings forecast, the risk of fall is higher when we are trading at high valuation, 20x one year forward P/E for Nifty50 index.
On the other hand, if commodity prices correct and a stability in bond yield is achieved, US Govt 10-year bond yields are in uptrend, the market risk will reduce. The level of correction can be limited to India being not a heavy importer of heavy metals. And fiscal & monetary support along with vaccination drive will reduce the rate of infection and open the economy in H2FY21 & FY22. But the risk to the domestic market could be a bit high this time, due to high valuation, possible slowdown in global market, high domestic inflation and hidden NPAs.
Understanding that a balanced portfolio of equity, debt and gold, is advised as per your risk averse appetite. Equity mix can be increased as future commodity prices & inflation is expected to stabilize, this period should be as short as one quarter to maximum three quarters, based on our current understanding of the economy & market.
Identification of stocks and sectors will be the key to have a safe portfolio. A conservative approach with high exposure to defensive sectors like IT, FMCG, Pharma and Telecom is suggested to add stability and reduce volatility. New drivers of the economy like Chemicals, E-commerce, Digitalization and Green oriented businesses due to government reforms & policies will add impetus in a pandemic and green energy-oriented world.
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