Nifty headed towards 17,200; large caps to drive the rally

Equity benchmark indices scaled to new highs in the month of August. Nifty touched a new peak of 16,712 while Sensex made a new high of 56,198 on August 25, 2021. Despite the rally benchmark indices, broader markets corrected as profit booking was witnessed. Nifty midcap and small-cap dropped 2% and 5%, respectively.

ICICI Direct is of the opinion that going ahead large caps are likely to outperform which would gradually drive Nifty towards 17,000-17,200 in coming months. “Over the past 15 months, buying on decline strategy has worked well. We advocate sticking to the same strategy. Therefore, a temporary breather after ~8% rally over past four weeks would present incremental buying opportunity to build a quality portfolio from medium-term perspective,” stated a report released by ICICI Direct.

The brokerage firm doesn’t expect Nifty to breach the key support threshold of 15,900 as the earlier breakout now acts as key support.

Broader market

According to ICICI Direct, the broader market is likely to undergo higher base formation which would make the larger trend more healthy. For the first time since April-2020, it has breached the previous month’s low along with a breakdown in the upward sloping trend line, indicating a pause in upward momentum. “Thus, the round of consolidation should not be construed as negative. Instead, dips should be capitalised on to accumulate quality stocks,” the report added.

Sectoral outlook

The Bank Nifty witnessed an extended consolidation in the 34,500-36,300 range during the previous month thus forming a base for the next leg of the up move. “After the recent healthy base formation to break out above the upper band of the range (36,300) and head towards 37,700 levels in the coming month as it is the confluence of the measuring implication of the recent range (36,300-34,800) and the previous all-time high of February 2021,” noted the report.

The IT index extended its outperformance during the month. Going forward, ICICI Direct expects the sector to continue its relative outperformance albeit a mild profit booking in short term cannot be ruled out after a strong rally. TCS, Tech Mahindra, HCL Tech, Mindtree are expected to outperform while Cyient and Teamlease provide a favourable risk-reward setup.

On the other hand, the metal index underwent healthy correction and is expected to resume its uptrend after a brief consolidation. Hindalco, JSL, Vardhman Speciality steel outperform while the risk-reward setup in Tata Steel, SAIL, Graphite is favourable.

Similarly, the Healthcare index snapped a five-month winning streak as profit booking set-in in run-up large-cap stocks. The sector is likely to underperform in the short term amid stock specific action. ICICI Direct is bullish on Divis, Abbott India, Sanofi, Fortis and Navin Fluorine.

The brokerage is hopeful that the consumption sector would outperform on a relative basis. While staples have broken out of their consolidation patterns, many discretionary stocks are at good support levels. Asian Paints, HUL, Titan, Havells and Kajaria are ICICI Direct’s top picks from the sector.

The Auto index extended profit booking in August 2021, underperforming benchmarks. Some bounce in the sector is likely however it is expected to underperform. Escorts, Minda Industries, VST Tillers are likely to outperform.

“The real estate held higher high-low despite recent profit booking. The ratio is trending up and expected to trend further higher,” the report said. ICIC Direct is bullish on JK Lakshmi Cement, Brigade and KNR Constructions.

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