Near-term correction cannot be ruled out on D-Street; here’s what you should do now

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With signs of optimism, Indian indices crossed earlier lifetime highs. The steady decline in daily Covid-19 cases and pickup in inoculation drive were among a few driving factors. India’s corporate profit to GDP ratio hit a 10-year high in FY20-21 which was possible despite a shrinking topline as trimming down operating costs aided margins along with a contraction in GDP.

Given that corporate profits primarily depicts the formal economy, the pandemic only managed to intensify the shift in market share from the unorganised to the organised sector just like GST, demonetisation and RERA have done in the past couple of years. Despite several liquidity measures and prevailing rock bottom interest rates, there appears to be a tectonic shift of market share towards the organised sector, crippling the unorganised or informal sector.

In this week’s monetary policy, the RBI kept interest rates unchanged and continued to remain in line with the US Fed and European Central Bank who have continually maintained their accommodative stance. Central bankers in developed countries appear to be much more relaxed with modest to fairly higher levels of inflation now. The sheer comfort of the central bank on their historic expansion of balance sheets over the last year indicates that it is not likely to be unwound anytime in the foreseeable future.

With domestic bourses touching lifetime highs, a near term correction sooner or later cannot be ruled out given the overheating in terms of valuations. Investors can look to accumulate good quality stocks from a quality perspective in a phased manner.

Event of the week

Sugar stocks have been experiencing multiple long-term and short-term tailwinds for some days. In lieu of rising oil prices globally, the government recently brought forward its target date to 2023 for achieving a 20% blend of ethanol from the current 7%. With the accelerated need for ethanol, sugar companies are bound to see capacity expansion for ethanol production, driving higher margins compared to the current sugar realisations. In the near term, supply constraints and output limitations from major exporters such as Brazil, Thailand and the EU, augurs well for Indian sugar prices. However, investors must keep in mind the cyclicality of the sector and the FRP, subsidy prices before jumping into the bandwagon as there are several risks involved despite the favourable macros.

Technical outlook

Nity50 index has crossed the major rising channel support and is now trading around it. Market breadth also remained positive for most of the week but Bank Nifty is still a point of concern given that it is still trading below its previous resistance. Bank Nifty might take its own time to catch up but it can also turn out to be a classic Dow Theory divergence where one index is making a new high but the other is making a lower high. Until we don’t see any significant bearish evidence, we suggest traders maintain a mildly bullish outlook. The immediate support is now placed at 15350.

Expectations

The fourth-quarter result season pace has been relatively slower this fiscal wherein relatively fewer companies from several sectors have announced their earnings till now. The coming weeks could see a number of PSU heavyweights including SAIL, NTPC, Coal India etc. in focus as they come out with their numbers. Further, key developments on the disinvestment story could also keep the PSU stocks on radar. Investors should therefore place trades cautiously on PSUs to buffer from any unforeseen shocks owing to such announcements. Meanwhile, Indian markets could continue to mimic the movement across global commodities and equities. Nifty50 closed the week at 15,670.25, up by 1.52%.

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