'Time to be cautious and book profits as sustenance of momentum may be difficult in near-term'

After the dramatic US election outcome in November, it was widely expected that markets will move to a new zone. This was because new investments were put on-hold during September - October, awaiting the election outcome and the US Federal Reserve's view in November policy meeting.

The outcome was better-than-expected, unleashing high amount of funds to be deployed in the market. It was a shot-in-the-arm for the economy and equity market, which was already turning positive under the benefit of a rebounding economy and earnings growth on a QoQ basis. The inflows came in stronger because the economic situation is likely to get better. The next biggest trigger the market is hoping for is the succeeding set of stimulus measures promised by the US and Europe Government expected in December-January.

As a result, the market trend is shifting from defensive to growth stocks. In India, FMCG, Pharma and IT sectors, which are the best performers of the year, are being shed for sectors like Banks, Auto, Metals, Reality and Infra. It is anticipated that such stocks will re-rate due to rise in the economy and shift of investors' money to growth stocks. Nifty Bank, Metals, Reality and Infra indices were up by 20 percent, 16 percent, 15 percent and 10 percent respectively, in the last one month.

But please note that IT and Pharma, are the two Indian sectors which have developed a very high appreciation around the world. Today, it is considered as a quality service & product provider with high brand value. Even as their prices and valuation have been re-rated, and higher re-rating can be expected given the better outlook for digital and pharma products, on a long-term basis.

On a near-term basis, we feel that a lot is factored into the Indian stock prices and it is advised to turn a bit cautious. The month of November has been very good for the markets and the trend may turn difficult to maintain in the near-term. Cyclical sectors can reverse if the economy and money inflows take a breather as pent-up demand slows down due to rise in COVID-19 cases leading to restrictions. Additionally, premium valuations can also limit the rally. At the same time, the market may also pause to see the size of the stimulus to be finalised in the US and Europe.

FIIs have brought in Rs 45,732 crore till November 19, already crossing the high of August. Domestic MFs are facing redemption pressure, in September quarter it sold Rs 22,000 crore of equities and Rs 14,000 crore in October. As a result, MF selling in the market has increased. MF sold Rs 16,000 crore in October and Rs 14,000 crore till November 18. Well, this could be more due to the fear in the minds of retail investors and herd mentality due to uncertainties over the long-term impact on economy and jobs.

While the market has reverted quickly urging investors to behave cautiously and reduce exposure in equities. Also, the high outflow in October could have been due to anxiety over expected volatility of the US elections. This mentality can continue to gain in the near term, but will not impact in the medium-term as the outlook has improved and the market has strongly recovered, regaining all the losses post the eruption of COVID-19. Next year is likely to be better supported by a rebound in the economy, earnings growth, easy money supply and further fiscal & monetary supports in the world.

This week, the Indian market opened at all-time highs, factoring trading holiday on Monday and with global markets opening this week very well. The Indian market, especially sectors like banking & metals, and investors were optimistic about the possibility of India getting the first set of vaccines in the next two months. Similarly, the global market was positive accounting for another new vaccine development by Moderna, and eradicate the pandemic in 2021. The complete deployment and distribution of vaccine may take the full year of 2021. Developed countries and highly capable pharma capacity countries like India will have an advantage over the rest of the world.

As a result, although the global markets started well, mixed sentiments owing to increase of virus cases and tighter restrictions in the western world, added to the volatility. Optimism over the development of a vaccine is still outweighing concerns over the next wave attack of COVID-19. We recommend investors to start considering partial profit booking, on a short-term basis, due to gaps developing between the actual performance of the economy and the market rally.

(Vinod Nair, Head of Research at Geojit Financial services.)