India is expected to have a fast vaccination drive from July onwards and vaccinate a large part of the population by December.
Vinod Nair
May 23, 2021 / 08:06 AM IST
Banking stocks took a breather as fall in COVID-19 cases helped in soothing asset quality concerns
This week the market started with a strong gap-up, for two days, due to fall in domestic COVID-19 cases. Elevated infection rate was the main reason for Indian market to trade weak compared to the rest of the world for a period of 3 months, till April. Now, the market is expecting a rapid fall in COVID-19 cases, prompting the downgrades in GDP & corporate earnings forecast to stop henceforth. An important reason to do well hereon.
This week’s popular sectors were metals, banks and auto stocks. Metals started well as the best performer due to rising international metal prices, as a result of high demand & supply constraint, especially in China. Upcycle in commodities is also sealed by global demand and accommodative monetary policies leading to high earnings upgrades for metals companies. Metals like Steel, Copper and Iron Ore are trading at super cyclical high. But lately it also triggered a fear of inflation in the world economy disrupting feasibility of projects and sustenance of capex expenditure. This has led to correction in metals sectors and expected to remain dull in the short-term.
Banking stocks took a breather as fall in COVID-19 cases helped in soothing asset quality concerns in anticipation of opening of the economy and improvement in repayment & new loan growth. Top high-quality private banks are in demand assuming value buy on a long-term basis.
Auto sector is in demand expecting robust recovery in volume from Q2FY22 onwards due to pent-up demand. Stability in currency and limited impact on exports is adding strength to the sector. Domestic demand and opening up of major developed economies are expected to increase discretionary spending. Concerns on margins have raised but can reduce as elevated commodity price is expected to reduce in the future while shortage of semiconductor can continue in the short term.
Global market was muted this week ahead of the release of Federal Reserve’s policy minutes. Sentiment improved marginally post the announcement of accommodative stance as it was below expectation. Fed minutes signaled a plausible slowdown in bond buying “at some point’ in the future, a shift in policy has increased which will have an implication on emerging markets (EMs) in the medium to long term.
But EMs are extending their gains not anticipating any immediate impact. The US market is underperforming due to rise in treasury yield and dollar index anticipating higher inflation and rates in the future. A reverse in performance between Developed and Asians markets is expected with appreciation in EMs currency, noticed this week too. In India, optimism from declining COVID-19 cases has resisted a sharp correction in the domestic market. The rupee appreciated by 50 paisa this week to 72.8 per US dollar, during the trading hours on Friday evening.
The recent sharp rally has triggered some cautiousness in the near-term. A consolidation due to overheating of the market cannot be avoided but undercurrent is positive on a medium to long-term basis. The effectiveness of vaccination is well understood, daily cases in the US & UK collapsed as vaccination as a percentage of population increased. Economic activities expanded with rise in inflation. India is expected to have a fast vaccination drive from July onwards and vaccinate a large part of the population by December. The plausibility of further re-opening of the economy has enlarged and huge fiscal expenditures are expected to raise new and pent-up demand.
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