With mixed bias, market may be range bound in the short-term

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FII’s net-inflows have grown effectively from the highest selling of Rs65,000 crore in the month of March to Rs5000  crore in April to positive Rs14,000 crore in May. The trend turned more buoyant this month, in just about 7 trading days, the net inflow has grown to more than Rs15,000cr.

In the global market, foreign investors had started to turn positive since the end of March due to stimulus and then later in expectation of the global economies opening up. The demand is expected to revamp quickly, of course not entirely to the pre-covid level, but to a good extend improving market rate and investors’ confidence.

Buying first triggered in the global market during which emerging markets like India were hugely underperforming. Developed economy turned buoyant supported by big fiscal and monetary policy. US Federal Reserves (central bank of US) has increased from $4trn to $7trn in a short period of time and $500bn fiscal stimulus was announced by the government, more measures are anticipated in the coming months. Look at the sheer size of the international stimulus, the total India GDP is forecasted at Rs200trn in FY21E which is $2.6trn. A good size of benefit was also provided in UK, Europe and Japan, respectively. This triggered a high amount of liquidity in the financial market and as economy opened in staggered manner and the liquidity spread to their respective equity market and then to emerging markets like India. Return of money to India has just started and it is not completely driven by free liquidity in the world but also in expectation of revamp in our economy & domestic inflows. This positively is also due to confidence that it will behold the economy and avoid insolvency in the future.

The buying was supported by cheap valuation of the market which went back to the low of 7 yrs that too in a span of just months. For example, the valuation in India for Nifty 50 on a trailing basis, fell from 26.5x in February to 14x-15x in April (7 yr low was about 14x), currently it stands at 20.5x. The panic assumed that the economy may be closed for an extended time and pandemic will lead to a chaos in the economy. Now it is concurring that we will have to live on with the risk of virus and grow the economy.

The Indian market has been doing well in the last 2-3 weeks, but please don’t believe that we will continue to do well in a straight line and outperform the world equity market. The recent performance is a natural and late reflect of what happened in the world market since mid of March, in which we were underperforming. To come back to its glory, we will have to completely open the economy and revamp demand which may be difficult to forecast today given unique demography of our nation. We may have to stay on with the policy of social distancing in the short to medium-term. Government & RBI have provided stimulus to float the economy for about 6 months (till August to September) and we may have benefit of the opening of world economy. Till that time, health situation and economy policy have to face the dire consequences which may re-emerge.

Mid & small caps have done well recently, but the outlook for mid & small-caps are still lukewarm compared to large caps, given high risk, considering fall in economy outlook. Large caps will continue to trade at premium valuation given better risk-reward & stability in business. In spite of the correction in valuation, it is marginally above for midcaps while very expensive for small caps. The economy is being unlocked, this tepid outlook can completely change if economy reaches near normalcy successfully. We need to be stock specific in mid & small caps and consider businesses available at attractive prices and stable outlook. Stocks in segment like Chemical, Agro, Pharma, IT and Exports will do better in this transition. Sticking more with large caps is advisable in the situation.

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