When the Nifty scaled the 10,600 mark on July 03rd the index had gained a full 40% from the lows of March 23rd, with almost all the gains coming after the lock down was announced. Can the Nifty sustain the rally in coming weeks?
Banks triggered the rally
If you look back at the rally since the start of June, it has been largely driven by private banks and PSU banks. Apart from banks, rate sensitive sectors like autos helped along the way. Clearly, the jump in rate sensitive stocks was led by hopes that the Indian economy would bounce back and the recovery would happen sooner rather than later. Contraction in GDP is a reality but what the markets are betting on is a pick-up in growth post the September quarter. That is what has buoyed the Nifty rally.
Reliance proves a point
It is rare to see the most valuable stock in the market doubling in less than 3 months but that is exactly what Reliance managed. The doubling in stock price was driven by two factors. Firstly, RIL managed to successfully see through its Rs.53,200 crore rights issue in the midst of a highly challenging market scenario. Secondly, Reliance managed to raise Rs.117,500 crore by selling 25% stake in Jio Platforms to marquee investors. This underlined that there was still a lot of appetite among investors for good investment stories. That also helped!
FIIs give a thumbs-up
One thing about the month of June was that FIIs have given a virtual thumbs-up to the Indian markets. After being net sellers (debt plus equity) in the first five months of the year, India actually saw net inflows in the month of June. Of course, FIIs were still marginal sellers in debt but the equity buying in June was so robust that it more than made up for the selling in debt. FIIs have not only found the valuations attractive but they also see minimal risk at a time when the valuation premiums of Indian markets have come down sharply. In addition, earnings yield (inverse of the P/E ratio) has also become attractive as compared to the bond yields, making a strong base case for the FIIs to invest in India.
Beware of the lag effect
In the midst of all this optimism and euphoria, there is the lag effect that the Indian markets have to be cautious about. The disruption of supply chains in terms of raw material availability and last mile markets may still be a big task for Indian companies. Most of the labor force that migrated back to the villages may take some time to come back. But, more importantly, the income effect may take a much longer time to repair. Millions have lost their jobs, their main livelihoods as well as incurred losses in their business. This could create a huge lag effect on demand. That is the big challenge for the Nifty going ahead.©