After the good set of results for second quarter, investors are looking for fresh triggers to maintain their thrill in the market. And these triggers have to be strong enough to expand the impression given 26% return of main benchmark and 50% return of mid & small caps on a YTD basis. Though Q2 has given room for further upgrade in earnings, we can assume that a part or large portion of this may be factored by the market. Because Sensex is up by 7.5% whereas Mid & Small caps are up by 11% to 15% respectively over the last 2months which is about the time Q2 result season started. During the week upcoming sensitive data like Q2 GDP growth, F&O expiry and OPEC meeting led to a conservative mood to the market. But they were trading with a positive bias with some volatility of gains & losses. PSU Banks underperformed on account of profit booking after the recapitalization led rally while renewed buying was seen in IT sector due to some stability in business outlook and fair valuation. The outcome of upcoming state election (Gujarat & Haryana) in favour of ruling party could be a catalyst for further uptrend.
On the global front, Fed’s divergence over the opinion on inflation in the recent minutes may refrain the chair to take aggressive rate hike in Dec which may be positive for emerging market. Market traded in a narrow range due to status quo in S&P sovereign India rating where investors expected a positive revision. But broadly the downside in the market is protected as global cues are positive and INR continue to stay on the positive side. From the recent depreciated level of 65.7 INR has appreciated to 64.4 (2month high) and 10yr bond yield is likely to consolidate lower after touching a high of 7.07 recently. Net inflow by FIIs has expanded to Rs16,200cr in Nov (till date) from Rs1,900cr in Oct.
The month of Oct & Nov has been good for the domestic market led by factors like good result, cut in GST rate, improvement in economic activities and upgrade in rating. The performance of Dec – Jan is usually volatile in the global market led by long holidays and upending FED rate hike decisions. In addition to that, this time, we have elements like the outcome of state election & OPEC meet which can provide some volatility in the near-term.
We understand that none of these outcomes are likely to adversely impact the Indian equity market. Since none of them are unknown, whereas on the contrary they are well understood and forecasted to be positive in the long-term. So we feel that the most important risk to the market is the very high return in the hindsight poured by liquidity leading to above average valuation, which can come under threat if earnings or economy does not follow over the next 1 to 2 quarters.