Post Market views - March 5, 2021 - Mr. Binod Modi, Head Strategy at Reliance Securities
(Time Zone: Arizona, USA)
Domestic equities corrected for second consecutive day as rise in 10-Year USA Treasury yields and commentary from Federal Reserve chairman on rising bond yields weighed on investors' sentiments. Barring FMCG, all key sectoral indices witnessed sharp pullback with Metals and PSU Bank indices witnessing steeper correction in the range of ~3-4%. Notably, volatility index soared further by over 7%. Further, midcap and smallcap indices witnessed steeper fall than benchmark index as investors indulged in taking some profits off the table after sharp rise in this space in recent period. GAIL, ONGC, Maruti and Hero Motocorp are top gainers, while IndusInd Bank, Wipro, Tata Motors and UPL are laggards.
Clearly, rising bond yield fear, which appeared to have softened last week, has come to the fore again with back-to-back sharp rise in USA treasury yields. A higher bond yield reduces future earnings or cash flow projections and therefore premium valuations of equities become doubtful. However, we continue to believe that recent rise in bond yield is discounting a faster recovery in economic growth and this is unlikely to northward beyond a point. However, spread of over 465bps between India's GSec Yield and USA Treasury Yield still offers comfort. Given continued rebound in high frequency key economic indicators in Feb'21, we believe underlying strength of domestic equities remains intact. Further, likely pick up in capital expenditures in FY22E and impact of new reforms announced in the budget to stimulate consumption activities should continue to support ongoing rebound in corporate earnings. Hence, we believe that any meaningful correction in the market should be an opportunity to buy quality stock at reasonable valuations as India continues to offer superior growth prospects. In our views, infrastructure, industrials, engineering, building materials, banks and select auto stocks are likely to outperform in the medium to long term perspective as these are the key beneficiary of higher capital expenditures.