The rally of Q1 will be tested in Q2


Q1 rally was supported by liquidity provided in the financial system with fiscal, monetary policies, and regulatory relaxations. In India it was supported by inflow from retail and domestic institution and later followed by FII’s risk-on strategy. The Q1FY21 performance of the market has been very broad-based. Large caps were up by 20%, Midcaps by 25% and Small caps by 30%. Market made a low in the last week of March. Initially the performance was tilted towards large-caps and sectors like FMCG, Pharma and Telecom. Then by mid-May and June, the underperformers strengthened in expectations from the re-opened economy. Few heavyweight stocks like RIL did help the market to do better, given its higher weightage of 11.8% in Nifty 50. Calculations show that from the 20% QoQ return for Nifty 50, about 6% is from RIL. But please note that all the stocks in Nifty 50 are up on a quarter basis, except four stocks, with average return of 28%. Otherwise, a decent section of mid, small and micro caps stocks are up by 40-50% in the last three months.

The sustainability of the rally will be tested in the next three months. We expect only stable stocks and business to do well, like FMCG, Pharma, Chemical, IT and Telecom. Underperformance will be seen in sectors like Infra, Capital Goods, Auto and Auto ancillaries, and Metals. Financial services like Banks and NBFCs are expected to be mixed due to NPA concerns, Fitch has forecasted on performing loans to increase to 13-14% in FY21. The ongoing trade issue with China is expected to have an impact especially on Pharma sector while some impact is also expected on Chemical sectors. The companies are considering diversifying to other sources and domestic capacity.

We reiterate our near-term view of the market, of a narrow range of +/-5%, between 10,000 and 10,500 in Nifty 50, the later level will hold as a strong support. If 9,900 is broken next support is expected at 9,500 while on a technical analysis basis the best case could be 10,900. This is not the time when fundamentals can rule or trend the game due to uncertainty. For fundamentals, a lot depends on the prevailing hope that the second wave of covid-19 will weaken soon. The virus threat is expected to peak by September or November, and vaccination will be developed by H1 2021. Any delay especially in development of vaccine will derail the hope and momentum in the market. The possibility of such a disruption seems unlikely today as race for vaccine development is tilted positively.

The global trend will be very important for India to define the trend in the near-term. US market has been consolidating in the last one month with a negative bias. It has registered the biggest quarterly gain in more than two decades, up 20%  in S&P500. The performance was support by huge fall in the month of February and March which was boosted by improvement in economic data and outlook backed by the largest stimulus in the history. The probability of second wave of covid-19 was considered low initially but it has turned a nightmare for the market. Daily cases have increased to a seven day average of ~43,000 from ~22,500 as on 15th June. This is due to relaxation in restriction and opening of the economy. This will impact the phased re-opening of the economy and also add concerns over FIIs inflows to India as they will shift to safety of US treasury and debt which is guaranteed by US Fed. In India the government is considering to open the economy with phase 2 which is positive but virus risk has increased to 18,500 from 11,000 in 15th June, so restrictions will be maintained impacting public confidence and business.


  1. Sir, Pls advise whether the market will continue in the upward direction in coming days and what is abt Aug’20

    • We have a cautious view on the market in the short-term due to plus 40% return in less than 4months from the March low which will be difficult to maintain in the near-term since fundamentals continue to be weak. Q1FY21 results has started for which the expectation is very muted. Technically, if Nifty50 is able to convincingly cross over 10,830, then 11,100 is achievable while 10,500 and 10,000 are solid supports. Currently global market is positive due to possible buying by FED of private assets and developments on vaccine, which will limit fall. We do not expect a fallout in the market rather risk of short-term performance during July to Sept.


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