Web Exclusive
Rising bond yields, commodity prices to cap market upside, say analysts

Since their March 2020 low, the Indian markets have mostly have been on a secular uptrend
A sharp surge in bond yields coupled with rising commodity prices have come back to haunt equity markets, with most analysts expecting a limited upside for the equity markets from here on.

On Friday, Asian stocks traded sharply lower after Wall Street's main indexes tumbled, with technology-related stocks under pressure following a steep rise in benchmark US Treasury yields, which hit their highest level since the pandemic began – up 14 basis points (bps) at 1.5286 per cent. The surge came on the back of expectations of a strong economic expansion and related inflation.

“In line with the global trend, Indian yields have definitely bottomed out. Since the expansionary budget in February, Indian 10-year is up 28 bps to 6.18 per cent despite RBI’s verbal and explicit market support. Our December'21 end target of 6.5 per cent will likely be hit sooner. The gap between earnings yields (1/Nifty one-year forward PE) to 10-year bond yield is now at 156bps, which is 57bps higher than the long-term average,” said Mahesh Nandurkar, managing director at Jefferies.

Since their March 2020 low, the Indian markets have mostly have been on a secular uptrend.  Frontline indices – the S&P BSE Sensex and the Nifty 50 – have surged 92 per cent and 94 per cent, respectively till February 25. The rally in the mid-and small-caps has been sharper, with both these indices rallying 106 per cent and 128 per cent, respectively on the BSE during this period, data show.

Rising commodity prices, on the other hand, pose another challenge. Brent crude oil prices, for instance, have vaulted nearly 250 per cent to around $66.59 a barrel now since their April 2020 low. Copper prices traded near 10-year high, while other base metals also gained as the US Federal Reserve reaffirmed its loose monetary policy to support growth in the world’s largest economy.

According to a recent report by BofA Securities, 31 Nifty50 companies, or 46 per cent of free-float weighted Nifty market-cap, are exposed to commodity-related risks and cautions that the full impact of the rise in commodity prices is yet to play out.

In this backdrop, analysts see a limited upside for the markets and see the indices enter a phase of consolidation.

“Historical analysis suggests Nifty may still rise though our favored (bond - earnings) yield valuation parameter is pointing to only a single-digit market upside. Housing driven capex plays & cyclicals should outperform,” Nandurkar adds.

A similar view is echoed by analysts at Credit Suisse Wealth Management. Though the long-term fundamentals remain intact and remain bullish on the cyclical sectors, they too expect the markets to consolidate after a sharp run since March in the backdrop of near-term headwinds.

“The India equity market has been pricing in many positives, and we expect it will consolidate in the near-term. However, given our constructive outlook for equities from a medium-term perspective, we recommend investors to focus on buying the dips with a preference for cyclical sectors over defensives,” wrote Jitendra Gohil, head of India equity research at Credit Suisse Wealth Management in a recent co-authored note with Premal Kamdar.



Dear Reader,


Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel