Investors should turn focus towards export-oriented sectors now

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Benchmark indices had nothing short of an erratic week following WPI inflation numbers, which hit their 11-year high at 10.49% for April. While higher inflation is disturbing the Street, its near-term impact was outweighed by the declining Covid-19 cases in India.

While FPIs turned net sellers only last month, India held on to its position as the most preferred emerging investment destination since April 2019, barring a few months. In the past 12 months, it has garnered the highest FPI equity inflows of over Rs 36,618 crore (as of April 30). Brazil ranks second with around Rs 10,811 crore as per CLSA data while other EMs such as Indonesia, Taiwan, Thailand and South Korea have seen net negative net flows.

This data indicates that a few months of FPI outflows could cause short-term corrections in the markets but at the end of the day Indian markets continue to remain stable at the current moment. Additionally, as DIIs continue to add equities, bourses may continue to be at loggerheads between the two sides.

Central bank measures

RBI continued its G-Sec buying programme, which further funnelled growth across the Indian bond markets, enabling the central bank to sustain the current low rate environment while maintaining yields within the 6-6.5% range for the 10-year bond.

While inflation has taken centre stage across broader markets, fuelled in part by the rising commodity prices, the result season has shed light on another perspective. India is amidst a demand-pull scenario that is driving earnings and re-rating stocks. Production activities have been at normal levels across consumer goods, for both durables as well as retail, but logistical constraints have emerged owing to limitations in mobility which has led to both declining volumes and lower realisations for companies.

Consumption in the discretionary space has seen a drastic decline because, despite liquidity, the common man continues to prioritise his spending towards essentials. This excess money seems to have been diverted towards gold to an extent as it continues to gain traction as an inflation hedge. While demand continues to remain subdued in the short-term due to lockdowns, the trend in merchant exports has been improving strongly as it saw a 195% jump YoY and a 17% jump since April 2019.

Organisations are balancing out their inventories by increasing their share of exports to offset domestic cutbacks for the time being. Investors can keep various export-oriented stocks on their radar and should allocate a certain portion of their portfolio to gold. A good way for retail investors to invest in gold would be to lap up the current sovereign gold bonds in the market which also have a decent interest component attached.

Event of the week

The government’s ambitious strategic divestment plans of Rs 1.75 lakh crore for FY22 has temporarily been derailed on account of the second wave. From due diligence processes for Air India and BPCL to divestment of SCI and BEML to partial stake sale in LIC through an OFS, the timetable of scheduled activities has been unwillingly delayed. But undeterred by these setbacks, the government managed to sell a majority part of SUUTI’s remaining stake in Axis Bank via OFS which might garner close to Rs 4,000 crore. Hence, even with this temporary derailment, 80-90% target still appears attainable which can still save some damage on the fiscal front.

Technical outlook

Nifty50 index closed the week on a positive note and crossed the previous short term resistance of 15,050. Although it is trading very close to its all-time highs but it is still below the rising channel and has not given any directional move to break it yet. Nifty needs to close decisively above 15,200 to start a fresh bullish move within the channel. As long as it does not take a decisive direction, we maintain a sideways to mild bullish outlook.

Expectations for the week ahead

Given that global macros have been finding a grip amidst the pandemic, domestic benchmark indices may continue to dilly-dally in the near term. Adding to this, the Fed indicated that they would discuss scaling back on the massive asset purchase program if the current recovery pace continued. With a hint towards liquidity tapering, bond markets continued to witness sell-offs and going forward if there is lower buying support from the Fed, the impact would be clearly visible in price moves. The turnaround in results can keep the Street going at least for a couple of weeks more. Nifty50 closed the week at 15,175.30, up by 3.39%.

(The author is Head of Equity Research, Samco Securities. Views expressed are personal)