Beware! These risks might derail the bull run

Equity benchmark BSE Sensex surged over 400 points to scale a fresh intra-day record in early trade on Tuesday, tracking gains in index-heavyweights Reliance Industries, HDFC twins and ICICI Bank, amid a positive trend in global equities.

After touching a lifetime intra-day peak of 53,057, the 30-share BSE index was trading 443 points or 0.84% up at 53,017 at around 10.40 am (IST). Similarly, the broader NSE Nifty gained 133 points or 0.85% to 15,880.

On a year-to-date basis, the 30-share pack Sensex and 50-share Nifty index have advanced over 10% till date. However, Edelweiss Securities sees three emerging risks that may start impacting the markets and stocks. Have a look:

Monetary policy challenges: India’s CPI at 6.3% (WPI at 12%) is now beyond the RBI’s 6% tolerance range, it is led by tax-laden energy prices – but is beginning to broaden, and with relatively firm global agri-prices, could have widening ramifications. That it is coming at a time when the lower economic strata has had to bear the brunt of lockdowns, will mean that the RBI will need to actively monitor its current and market-comforting market stance. Edelweiss believes two more readings at these or more elevated inflation levels could prompt a relook. A more hawkish Fed – some evidence already – will also reopen the path ahead.

Margin challenges: In the face of rising costs amid a sharp profit focus, India’s corporate profitability, measured in operating margin terms, is at an eight-year high. While this has been primarily driven by operating cost control, it has been aided by gross margin support for most businesses. This is already beginning to reverse with the commodity or input cost escalations in play. Edelweiss believes this could become an additional challenge – given most businesses in India are now very profit margin focused—and given modest topline growth, will be reluctant to see the margins moderate.

Demand risks: Edelweiss also believes that with underlying demand risks on account of the second wave and the ‘psychology of demand’, and the corporate focus on profitability, the likelihood of corporates pushing through price hikes will further risk demand. “We also believe this will likely be more upfront, given broad-based input and energy inflation are already in play. The street is still building in strong acceleration in demand and could be poised for disappointment,” Edelweiss Securities said.