Market likely to correct post Diwali; realty and metal stocks well poised

Markets opened this past week on an extremely bullish note in line with positive international cues. A rejig of the MSCI Emerging Markets Index made FPIs buy heavily into Indian equities, which further lifted the mood. A likely increase in India’s weightage in the emerging market index from December could be the driving factor of the sudden burst in fresh investment in private sector banks, which have otherwise been laggards in this entire rally from the March lows.

At the same time, PSU bank stocks witnessed negligible buying, which means the is a fractured rally and once buying on the index rejig is completed, the market is likely to cool down and enter a longer timewise correction. The news of a Covid vaccine also created a temporary euphoria, which soon withered away as it may take a long time before the vaccine reaches countries like India.

It is worth noting that back in the last week of March, FPIs had aggressively sold stocks to a tune of Rs 10,486.31 crore, which marked the very bottom of the market. If history is to be believed, such concentrated FPI buying even now might register as an intermediate top in the short term.

In September quarter earnings, companies mostly reported strong profit numbers, those healthy bottom line numbers were driven by two factors: the corporate tax rate reduction offered in September last year, which is having its bearing on this quarter numbers for a last time, and secondly, lower operating expenses for a large number of companies, which are not likely to sustain once the economy opens up completely and activities reach pre-Covid levels.

Both the factors helped bottom lines of India Inc. Mr Market also has a habit of over-reacting in the short term and the pace of acceleration in PAT growth should reduce and prices might follow suit once things normalise. Investors are advised to not get carried away by this short-term euphoria and wait patiently for normalised earnings to kick in in order to assess the inherent growth matrix of any company.

Event of the Week
Fiscal Stimulus 3.0 was this week’s delight. It focused on employment generation, ensuring better access to credit and farm support aimed at fostering economic recovery. The total relief measures announced by the Centre and RBI now amount to Rs 29.87 lakh crore, or 15% of the GDP. It is estimated that the actual fiscal impact on the overall GDP might be in lower single digits, as the government has been frugal in offering direct benefits to the common man.

While other developed countries -- which have spent upwards of 10-15% of GDP -- are still struggling for economic revival, India seems to have already reached pre-Covid levels if one were to go by the manufacturing PMI, new record high levels of fuel consumption and the buoyancy in the stock market. It looks like a blessing in disguise that India has cruised through the pandemic without putting much pressure on its fiscal deficit.

Technical Outlook
After a non-stop rally of over 1,000 points, Nifty50 is now trading near its all-time high level. In fact, it has taken a breather to consolidate the gains. The index has become overbought in the short term and a profit-booking move cannot be ruled out. The majority of the recent move was led by metals and banking stocks, but IT was the laggard in the pack. Going ahead, Nifty50 may see a retracement up to 12,000-12,200 level in the short term on account of being overbought.


Traders are advised to maintain a buy-on-dips approach, unless Nifty breaks below the rising channel on the weekly chart. The index has immediate support and resistance at 12,400 and 12,800 levels, respectively.

Expectations for the Week
As the quarterly earnings and festive season are behind us, the market is likely to witness year-end blues now. Drawing analogies from a somber Diwali mood, Christmas celebrations too may not furiously ignite the heart of consumerism. Lack of any big trigger might drag the market lower and the participants might witness time and price correction in the journey till Christmas.

India is currently witnessing inflationary tendencies with October retail inflation coming in at a 77-month high. Therefore, investors should accumulate real estate and metal stocks, which can outperform in the current inflationary environment. Otherwise, it makes sense to remain patient and wait for a decent correction before buying.

Nifty50 closed the week at 12,720, up 3.7 per cent.