By: Tavaga Research
Benchmark indices witnessed a gap-up opening in today’s session that ultimately led the indices to their lifetime highs, which were earlier attained in January. Nifty hit the record high of 12,474.05 while Sensex reached 42,645.33 just before the closing of the session on November 09. The rally was followed by the broad-based indices with Mid-cap and Small-cap index levels gaining momentum.
Nifty 50 Index YTD Performance
The markets are being guided by positive investor sentiments on the back of a pre-festive rally and strong global cues. The following factors fueled the market surge:
Biden’s Presidential Victory in the US
Democratic representative Joe Biden was projected as the victor of the US elections to become the 46th President. The event was celebrated by markets across the world. The US markets had already rallied in anticipation of the election results going either way. Asian markets on Monday have reacted positively to the final result.
Nikkei (Japan), Hang Seng (Hong Kong), and Strait Times (Singapore) Index remained in the green territory. Nifty and Sensex picked up on the cues which led to a gap-up opening of the markets.
Markets are anticipating a clearer global trade scenario with Joe Biden’s Presidency. Even if Joe Biden’s Government is wary of trade with China, trade opportunities will surface for other countries to fill the demand. The stance on tariff policy is also likely to be clear.
The market is also positive towards the strengthening of Indo-US ties with Kamala Harris as the newly elected Vice President. Biden has also indicated a relaxation in the quota for H-1B visas.
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Increased inflow of funds from FIIs
Foreign Institutional Investors (FIIs) have been the net purchasers for the first week of the month. FIIs have spent Rs 41,022.11 crores and sold 27,622.70 crores as of November 06. FIIs have infused net funds of Rs 13,399.41 crores. The high inflow of funds by the FIIs have made up for the domestic investors that turned net sellers.
DII activity seemed on the mellow side with net sales of Rs 6,789.86 crores during the first week of November.
High foreign institutional activity is likely to push up India’s weight in the MSCI, which will encourage a further inflow of funds.
Favorable earnings season
The second quarter of the fiscal year is shaping to be a positive earnings season overall. The majority of the companies are reporting a rise in their bottom line and recovery in business levels.
Analysts are expecting a stronger set of numbers for the third quarter. A positive third quarter will also take over any concerns of pent-up demand during the festive season.
Pharma and IT have outperformed the rest of the market sectors. Nifty Bank is also building upon the quarterly earnings and gaining momentum. The financial services sector benchmark is already nearing its pre-COVID levels.
Nifty Bank Index YTD Performance
Nifty IT Index YTD Performance
HCL and Infosys are approximately 44 percent higher than their previous highs while Wipro and TCS are over 25 percent higher. Reliance Industries’ share price is also approaching its lifetime high of Rs 2,369. Reliance represents approximately 15 percent of the index weight. Reliance posted robust quarterly earnings and raised a significant amount of capital. Any rally in the stock will single-handedly put upward pressure on Nifty.
Strong macro outlook
October turned out to be a stellar month for high-frequency economic indicators. While manufacturing PMI has been in an expansionary state since August, services PMI expanded for the first time in eight months. Manufacturing PMI reached a high of 58.9 and Services PMI stood at 54.1 in October. The IIP data pointed to a slower rate of contraction in recent months.
Composite and Services PMI
A key highlight in October was a rebound in GST collections that stood at the highest level this fiscal year. Auto sales acted as a stimulant with companies reporting an increase in sales for the month of October.
Growth in power consumption, economic activity, and tax collections are factors aiding the market and pointing to the revival of pre-COVID levels. The timing is perfect to boost investor sentiment just before the festive season.
Rupee stays strong
A strong rupee benefits the economy in that India is a net importer. The Indian rupee is reinforced by the following prevalent factors:
- High FII fund inflows
- Weak US dollar
- Boosting domestic factors
Appreciating the rupee will control the rise in inflation by reducing the effect of an increase in crude oil prices. With inflation under control, consumer spending will remain on the higher side. Consumption stimulus is what the Indian economy needs at the moment.
Historically, an appreciating rupee hurts the aggregate Nifty earnings, especially companies that have earnings denominated in US Dollars. However, in the short-term, an adverse effect on the corporate will be offset by demand revival.
Going ahead, it would be beneficial for investors to stay cautious as the Nifty and Sensex valuations are almost fair at this juncture. The indices have rallied quite fast in a very short time, and hence, a clear focus on quality companies with sound corporate governance is called for.
The future performance of the indices depends upon a smooth transition from Trump to Biden, that is, the final outcome of the US Presidential elections 2020, vaccine for coronavirus, and the border conflicts with China.