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After 29% rally in H1FY21, the best in a decade, analysts cautious on mkts

The rally in H1FY21 comes on the back of a gush of liquidity
After a phenomenal rally in the first half of the current fiscal 2020-21 (H1FY21), analysts are now turning cautious on the markets and expect the second half of FY21 (H2FY21) to be marked with volatility. Given the slew of events lined up over the next few months, they believe, the markets are entering a phase of uncertainty.

The first half of the current fiscal (H1FY21) started on a somber note for the economy and markets with a nation-wide lockdown to stem the spread of Covid-19 pandemic that lasted a little over two months. Yet equity markets gained handsomely, with the frontline indices – the S&P BSE Sensex and the Nifty50 – rising 29 per cent and 31 per cent, respectively during this period. The rise in the first half has been the sharpest since 2008-09 (H1FY09) when both these indices had surged 76 per cent and 68 per cent, respectively.

The rally in H1FY21 comes on the back of a gush of liquidity. This far in H1FY21, the foreign portfolio investors (FPIs) have pumped in a net Rs 76,253 crore ($10.1 billion) in the Indian equity markets. On the other hand, domestic institutions (DIIs) have sold equities worth Rs 25,279 crore during this period, data show.

“The outcome of the US presidential election is one such event that the markets will focus on. That said, it remains to be seen how long can the markets and economy be supported by central bank liquidity. There is a clear disconnect with earnings. The markets are discounting FY22 and FY23 earnings as well at this stage. Ideally, the markets should be at least 20 – 30 per cent lower from where they currently are,” said Jigar Shah, chief executive officer at Maybank Kim Eng Securities. Among sectors, he prefers defensives and expects IT, pharma, consumer sectors to do well. That apart, he likes telecom and rural economy oriented sectors.

At the bourses, mid-and the small-cap indices outperformed the frontline indices in H1FY21 with a gain of 39 per cent and 55 per cent, respectively. Total 162 stocks have seen their market value more than double from their respective March 31, levels. Among individual stocks, Aarti Drugs, Ramco Systems, Mastek, Laurus Labs, Adani Green Energy, IOL Chemicals and Pharmaceuticals and Neuland Laboratories were the key gainers that surged 300 per cent – 500 per cent during H1FY21.

Markets, according to U R Bhat, managing director at Dalton Capital, are pricing all possible positives at the current level – be it a V-shaped economic recovery, possible cure / Covid-19 vaccine and geopolitical stability in H1FY21. “If any of these conditions surprises negatively there can be a correction. Though the markets will not re-test their March 2020 low, I don’t rule out a 10 per cent correction in case of a negative surprise on the above-mentioned factors,” he said.

The economic recovery, however, remains fragile with economists already cautioning the demand for goods and services could taper off in the months ahead, as pent-up demand gives way to households grappling with job losses and pay cuts.

“After a swift recovery in activity thus far, we expect the sequential pace of activity to slow in H2FY21, as new infections remain at elevated levels and as the pandemic is having an adverse impact on household jobs and firm profitability. We forecast overall gross domestic product (GDP) growth of -10.8 per cent in FY21, with growth likely to remain negative over the next three quarters (-10.4 per cent in Q3, -5.4 per cent in Q4, -4.3 per cent in Q1 2021),” wrote Sonal Varma, managing director and chief India economist at Nomura in a September 28 co-authored report with Aurodeep Nandi.


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