Rising bond yields may cool down Indian equity markets

Markets continued their optimism at the start of the week but due to lack of any motivation, the selling pressure took over after Nifty50 hit its new lifetime highs. Indian equity markets continued to move in tandem with international indices, especially in the US.

A sudden rise in domestic as well as global bond yields was a prime hindrance that moderated the enthusiasm of equity market participants throughout the world. Akin to 10-year G-Sec yields which rose nearly 17 basis points this week, US 10-year bond yields too saw a similar rise.

For an investor, it is imperative to know that rising bond yields are huge determinants of equity valuations. The taper tantrum of 2013 is one example that showed the relation between the two wherein a sudden rise in bond yields caused markets to slide as mass bond selling was witnessed.

Bond yields are inversely proportional to equity returns and when bond yields decline, equity markets tend to outperform while when yields rise equity market returns tend to falter. Therefore, this could be one of the reasons for Nifty’s correction this week.

Going ahead, Nifty could witness some pressure from the likelihood of strengthening of US dollar. The weekly chart of USD INR shows a strong appreciation in the rupee from November levels of 74.6/$ to 72.5/$ now. However, the current week’s performance suggests there could be a broad consolidation in the currency pair.

In the forthcoming weeks, any weakness seen in the rupee may build up some additional pressure in Indian equities giving a reason for foreign portfolio investors (FPIs) to book profits in the short term. Therefore, investors should look to book profits from weaker quality stocks and certain overvalued cyclical bets and shift to quality businesses on dips.

Event of the week

Q3 earnings season for Nifty50 constituents concluded and most companies have either managed to meet or beat estimates on revenue as well as profit after tax levels, suggesting a sooner than expected economic recovery post-pandemic-induced curbs.

Several factors such as volume growth recovery in rural and urban markets, price hikes and lower operating costs, along with various cost-cutting measures aided such strong earnings performance. Going ahead, earnings are expected to normalise once our economy opens up completely. Valuations would experience a re-rating as earnings continue to catch up to the price action.

Technical Outlook

Nifty50 made a new high of 15,431 but closed the week on a negative note. The index has made a bearish engulfing candlestick pattern which indicates price rejection at higher levels. The bulls are getting tired as the index is trading much higher than its mean levels and at accelerated rising channel resistance.

Hence, a brief corrective dip cannot be ruled out. Nifty50 has broken the immediate support of 15,050 and a sustained price move below the support can trigger some more profit booking.

Expectations for the week

In the coming week, investors should be cautious in benchmark indices and take note of any major movements in global markets. Domestic bourses are expected to be swamped with IPOs given that the sentiment encircling listing gains continues to persist.

Going ahead, markets are expected to remain dull and range-bound in absence of any major positive triggers. Therefore, investors are suggested to count on this opportunity to alter their portfolios by withdrawing monies from the weaker quality stocks and investing new monies in quality bets only on dips. Additionally, it also appears that the market is in a longer-term bull rally with an intermediate top in the making. Nifty50 closed the week at 14981.75, down by 1.2%.

(The author is head of equity research at Samco Securities. Views expressed are personal)