‘Traders are suggested to be light on the long side’

Markets this week remained volatile as it imitated the US markets. The smooth transition of power to Joe Biden and his inauguration kept the mood of the markets cheerful but higher valuations led to profit booking as well during the course of the week. As a matter of fact, earnings updates have turned out to be phenomenal which paved the way for flattening the valuation curve which otherwise would be steep. Such steepness can be owed to the prices running way ahead of its fundamentals and now the fundamentals are merely catching up, proof being the quarterly earnings performance. Market has various phases of the bull market the first one being the revival of confidence in the future course of business which was seen in Q2 earnings, second phase is characterized by the response of stock prices to the ground-level improvement in corporate earnings performance which is what we are witnessing currently and the third phase which is still ahead of us wherein rampant speculation and inflation will make stocks advance on mere hopes and expectations. Investors should play safely as markets have become very risky and over valued in the short term.

Our economy could be moving towards a massive inflationary price rise if not controlled. Prices of basic industrial raw materials like iron & steel, copper and everything from plastic to fiber have ascended anywhere between 50-100%. This swift price rise may pinch profitability of many intermediary companies while businesses who have fully integrated value chains will perform far better than expected. Further, industrial houses with investments in large and heavy manufacturing capabilities have already written down their assets long back which will benefit them, given the new players capex will be at a far higher fixed cost. Hence, this would eventually strengthen the old and existing companies bringing out profit margins and in turn better profitability than the new ones. Capital-intensive sectors such as cement, metal & mining, forging, heavy industrial machinery and even hotels are likely to observe growing profitability with rising inflation in the economy.

Event of the Week

This week’s quarterly performance further reinstated that fundamentals are indeed catching up with the stock price. Bajaj Auto clocked its highest-ever quarterly profit and revenue on account of exports and improved domestic sales aided by festive push and demand for personal mobility during the pandemic. Asian Paints too managed to report a 62% YoY jump in PAT while its revenue zoomed 25% along with improvement in margin to 26.3%. This was paint-maker’s highest ever revenue, profit and EBITDA too. A fair share of companies from different sectors also managed to beat expectations and astonished market participants but actually this is nothing but fundamentals catching up with the price action so far.

Technical Outlook

Nifty50 closed the week on a negative note after a weak opening. The index made an outside bar and it seems like it has started to feel the turbulence, as it is already trading overbought zones. The week remained highly volatile which could continue unless Nifty breaks below the 14200 mark which is its immediate support in the short term. A break below the same can trigger a huge profit-booking move to 13100 on the downside. Considering time period of the up moves it would be interesting to see that previous phase and the current phase coincides which hints that a bigger correction could play out this time around. Hence, traders are suggested to be light on the long side.

Expectations for the Week

Going ahead, the key trigger would certainly revolve around high hopes from the Union Budget which may set the mood for markets. Quarterly results would propel the volatility in bourses and participants may witness some sector reshuffling. Furthermore, one should keep a vigilant eye on the events encompassing Beijing (China) as the authorities have ordered mass testing and enforced a strict lockdown after resurgence in cases of the new coronavirus strain. China being a major member in global trade, any serious impact from the new strain may lead to uncertainty. And uncertainties do not bode well with the markets. Investors are advised to keep an eye on these major events and refrain from aggressively investing fresh monies. Nifty50 closed the week at 14371.9, down by 0.4%.

Nirali Shah is senior research analyst at Samco Securities

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