Post Market views - May 24, 2021 - Mr. Binod Modi, Head Strategy at Reliance Securities

Domestic equities remained upbeat despite mixed global cues as persistent decline in daily caseload and improvement in recovery rate in second wave of COVID-19 continued to lift investors' sentiments. Financials once again emerged as a main driving force as improving visibility about asset quality of banks and NBFCs supported rally in financials. Notably, baring FMCG and metals, most key sectoral indices traded in green today, while midcap and smallcap stocks outperformed broader indices. IOC, SBI, BPCL and L&T were among top Nifty gainers, while Shree Cement, JSW Steel, Tata Steel and Britannia were laggards.

As daily caseload in second wave remains below 3 lakh despite higher testing along with improving recovery rates, it indicates that second wave of COVID-19 is weakening. Therefore, assumption of peaking-out by second wave by the end of May or mid of June holds true and adverse impact of second wave should not be felt beyond 1QFY22. Investors will continue to focus on trajectory of daily caseload and vaccination ramp up in the country in the near term. In our view, possible withdrawal of restrictions in a phased manner by states from next week should boost more confidence among investors. However, minutes of FOMC meeting indicates diversions among members' view about higher inflation and accommodative stance and ECB's warning toward potential bubble in financial assets do not bode well for global equities including India. This raises concerns about possible taper tantrum in early 2022, which is also expected to weigh on investors' sentiments in the medium term and can be a fresh headwind for market. However, given weak dollar index, recent recovery in INR and emerging clarity over second wave of COVID-19, FPIs flow is expected to turn favourable again after seeing recent weeks of outflows. Further, investors in domestic equities will focus more on trajectory of corporate earnings in coming quarters. Notwithstanding some adverse impact on economic activities in 1QFY22E, a sharp pickup in capital expenditures in current fiscal is still on the cards. Hence, earnings recovery in FY22E still remains promising. Therefore, any near-term possible correction in the market should be treated as opportunity of bargain trading. Investors must focus on quality stocks with robust earnings visibility and margins of safety.

Source : Equity Bulls

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