Indian markets continue to trade at premium over other EMs; here’s what investors should do

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Markets continued to witness whipsaws this week but remained within range as the broader sentiment showed restrain given the absence of any significant developments across both macros and company-specific domains. The benchmark indices also continued their range bound journey given the confidence around the growth and progress of India balancing out any uncertainty around further Covid disruptions. Putting this sentiment to numbers, India witnessed an increase in its forex reserves to $608 billion which provides economic and trade comfort at least for a couple of months. FPI bullishness on India has pushed Nifty50’s P/E at 30.6x, helping it trade at a 25% premium to its 5-year average, by outpacing other EM peers as MSCI Emerging Index TTM P/E trades at 16.8x.

Despite concerns around rising headline and core inflation, markets have largely remained unfazed. While they continued their joyride, the commodity space is headed down a different path. The sprint in metal commodities which commenced back in 2020, is seemingly taking a breather. Talks from Chinese authorities hinting at inflationary control measures and the US’ hawkish stance on interest rates are causing the retracement in metal prices. Now, it remains to be seen if the letting off of the steam is just a minor hiccup in the super-cycle or it is way past the top and has become a question of deliberation.

But one thing is clear that the exemplary growth in commodity prices might not continue at the same pace going forward. Investors can therefore maintain a wait and watch approach and instead of basing trades solely on commodity price movements, they can observe the deleveraging in the balance sheet of companies. The utilisation of capital and free cash flow trend over the next few months will help separate the great from the good. Part profit booking can also be considered in the next leg of an up move.

Events to watch out

During the week, oil futures managed to deliver their fifth consecutive rising streak, climbing nearly 13.5% over a month. Oil prices ascending to multiyear highs can be because of some important developments. Firstly, global demand for oil is expected to attain pre-Covid levels by the third quarter of FY22 as economies open up driven by the uptick in mobility in the US and Europe. Post the US Fed meet, the dollar saw some weakness which enticed commodity prices especially crude. Additionally, lack of investment by global oil majors in new capacity due to reforms around ESG may cause a supply dearth, bringing about further optimism in crude prices. Traders are advised to keep a definitive trailing stop loss in place before betting on higher prices.

Technical outlook

Nifty 50 index has been trading sideways for almost three weeks now. It seems to be facing a temporary halt after a period of outperformance. Overall market sentiments in global indices look positive and eventually Nifty is also likely to catch up. After a strong bounce back from 15450, this zone is now being established as crucial short-term support. We suggest traders maintain a bullish bias on the market and remain watchful for any break of the crucial support, as this would lead to weakness in the short term.

Expectations for next week 

In the coming week, domestic indices are expected to mirror global equities. June auto sales numbers would give investors a fair idea of the revival of ground-level sentiment. However, it would be important to remember that markets have already started pricing in a strong rebound in volumes on expectations of pent-up April-May demand because of an accelerated inoculation drive, strong line-up of launches, lifetime low auto loan rates and a favourable monsoon. Investors can closely watch the unlock theme stocks as they could see knee jerk reactions depending on the development in the delta variant. Nifty50 closed the week at 15860.35, up by 1.13%.

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