Anticipate volatility in the next few weeks and capitalise from it

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The market is continuing its volatility in a very narrow range and is not able to take a decisive direction on either side. In the last two weeks, Nifty 50 has had a mixed bias, trading in a narrow range of 200 points, between 10,550 and 10,850.

The market is waiting for Q1FY21 results in India and global cues. The preview for Q1 is weak, mostly as expected, to be a complete washout. An analysis of India’s key equity barometer, Nifty 50 index, provides a grim expression of Profit After Tax (PAT), for all the top 50 stocks in India, and is expected to fall by -38% on a YoY basis. This is based on a Bloomberg estimate dated 12th July. The biggest fall is seen in the Auto sector followed by all other sectors except Financials, Chemicals, and Telecom. While the least impacted are IT and FMCG sector.

The silver lining is that on a QoQ basis the trend is improving. It is estimated that PAT will improve by 27% though this is mostly due to the low base of Q4FY20. This trend is expected to continue with improvement on a QoQ basis as the economy is being opened in a phased manner. Importantly, the sectors which are dodging this trend and which are expected to expedite in the future are Finance, NBFC, and Pharma. The sectors which had limited impact are IT, Chemical, and FMCG which can do better from next quarter onwards. Noticeably, few stocks which are overwhelming the situation are Zee Entertainment, Bajaj Finance, HDFC, ICICI, IndusInd, Britannia, HUL, RIL, Sun Pharma, Cipla, NTPC and Airtel Infratel.

The announcements of Q1 results are expected to increase post 15th July; hence the market is expected to be impacted, accordingly. The other factors worrying the Indian markets are the record cases of infections and an increase in localized lockdowns, which will slow down the recovery in businesses.

Global stocks were mixed following a record number of infections in the US, which led to worries of delayed global economic recovery. The weekly gains were mainly driven by liquidity, in expectation of private financial asset buying by FED, and development of Covid-19 vaccine. Global markets were weak following rising infections in US and US-China tensions coming back in the news.

In India, the volatility is expected to continue due to Q1, as earnings announcements increase. Profit booking is warranted due to solid bounce of plus 40% return from March low. Investors are advised to be cautious and be stock and sector-specific, as mentioned above in these periods.  For long-term investors accumulation, buying a fair amount of funds, as per your risk aversion, on a consistent basis, is the best strategy, especially in the next six months since the long-term direction of the market is intact. Technically, if Nifty 50 is able to cross over 10,850, then 11,100 is achievable while 10,500 and 10,000 are solid supports.

On Tuesday, 14 July, the indices showed robust gains initially but gave it all before closing flat with a slight positive bias. The IT index outperformed due to a strong showing from IT blue-chips, on the back of earnings results and commentary. Global cues were also positive after results from experimental vaccine trials progressed as expected. This optimism offset growing concerns regarding increasing infections, especially in the US and India, and also regarding the US-China tensions.

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