'Polarised' and 'sell on rally' may define markets' character, say experts

The negative sentiment towards key sectors such as banks and hospitality has also piled up since last week's stimulus package, which failed to address the concerns and meet market’s expectation of direct support from government.
The RBI’s acknowledgement of an expected shrinkage of economic growth in FY21 is bound to have a strong impact on Street sentiment.

RBI Governor Shaktikanta Das did not quantify the expected fall, which also suggests it would be anything but a V-shaped recovery.

This, along with higher inflation expectations and uncertainty over the cure for the coronavirus, is likely to keep stock markets more volatile. Money will chase stocks with high growth visibility, say experts, who point to the weakness in key indicators.

While March’s index of industrial production (IIP) contracted by 16.7 per cent, India’s manufacturing PMI (Purchasing Managers’ Index) hit an all-time low of 27.4 per cent in April.
G Chokkalingam, founder of Equinomics Research and Advisory, says: “Negative GDP growth outlook, extension of the moratorium, and funded interest term loans, etc, announced by the RBI point to deflationary pressure.” Unless there is a vaccine or drug to cure Covid-19, economic growth trajectory would remain challenging and the market is unlikely to see a sustainable rally, he adds.


Other experts like Dhananjay Sinha, director and head (institutional research), Systematix group, affirm. “While negative GDP growth is known and the markets have seen a correction in the past couple of months, there is poor visibility on the growth front and markets are not able to find any direction,” he says.

Sinha also says the markets will react to growth and sentiment, instead of valuation. Therefore, companies with no or low leverage and good cash position, such as consumers plays including staples and agro chemicals, will continue attracting investor attention, even if valuations are pricey.

Such an approach is already being observed since the past couple of quarters, in which Reliance Industries and select FMCG, IT, and pharma stocks saw higher investor demand. The Street will punish firms in which it finds any reason to doubt their growth prospects, as recently seen for IT.
The negative sentiment towards key sectors such as banks and hospitality has piled up since last week’s stimulus package, which failed to address the concerns and meet the market’s expectation of direct support from the government.

In fact, extension of the moratorium for another three months, and further easing of norms for working capital loans by the RBI to ease financial stress has hurt sentiment towards banking stocks. The Nifty Bank (down 2.6 per cent), along with NBFC stocks, were largely responsible for the Sensex’s 0.8 per cent decline on Friday.

There are some experts, however, who do not see significant pressure for the markets and expect increased equity allocation by investors. “The markets have actually held up quite well, despite the negative news all around. They have been, so far, driven by expectations of a V-shaped recovery as well as (increased) liquidity. In additions, interest rates are down and thus equity is getting higher allocation,” says Nirmal Jain, chairman of IIFL.

The jury, however, is out on this — especially if one reads into what the RBI governor said: “….markets have generally been disconnected from real economy developments.” This also explains the divergence between valuation and growth, say experts.

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