The first week of August saw, frontline equity indices touching a new lifetime high. Nifty and Sensex crossed the psychological level of 16,000 and 54,000 respectively. This has come after the market has remained in a very tight range of 15600 and 15900 for more than two months. Globally we are witnessing the equity market touching new highs including S&P 500 and Dow Jones Industrial Index.
Returns generated by the equity market globally have been phenomenal and the Indian equity market represented by Nifty 50 has been one of the best performing indices. For FY21, it moved up by 78 per cent only three other indices have given returns better than Nifty 50.
Even year-to-date return by Nifty 50 is one of the best-performing indices. The graph clearly shows that Nifty 50 is performing better than many other markets.
Many market experts are voicing concern about this rise in the equity market and are forecasting deep correction sometime in the future. So we will try to first understand what is making the equity market move ahead and then what are the events or triggers that can stop its march ahead.
Liquidity boom across the globe has remained one of the key reasons for a surge in the equity market. While liquidity surplus is undoubtedly likely to sustain for a couple of years more, the Federal Reserve has initiated discussions on tightening balance sheets and higher fed rates sometime in 2022-23. The ECB is also likely to end the pandemic emergency purchase program (PEPP) by March 2022. So the liquidity will remain abundant for a while globally.
While Fed officials are giving out mixed signals, higher inflation and buoyant growth are adding fuel to tightening expectations. US Fed Chairman Powell’s comments that discussions around taper and not rate hikes have started within the FOMC imply that as soon as the uncertainty around the pandemic is addressed, it might initiate tapering. ECB has also signaled easy monetary policy until inflation is durably above 2 per cent, but its PEPP programme is likely to end by March 2022. These announcements from Fed and ECB are expected from September’21.
The RBI also took several measures in the wake of Covid-19 to provide necessary liquidity into the system. It reduced the policy rate by 115bps and CRR by 100bps. To support the economy, RBI injected liquidity worth ₹17 lakh crore till now in the economy.
Therefore, next three to six months we do not see any major suction of liquidity out of the system that may impact the market adversely. The only caveat to this is if inflation does not remain transitory and becomes persistent. Even after rising in inflation, we believe that it will take some time to unwind the expansionary monetary cycle. There is a multiple-step process of unwinding in this cycle and we might be in the first or second step.
The Q1FY22 earnings to date can be considered a mixed bag with a few positive surprises as well as a couple of significant earnings misses. The IT sector performance was healthy overall with Infosys upping the guidance for the year. Tech Mahindra and Wipro, too, reported a good set of numbers while HCL Tech reported a marginal miss. The BFSI continued its mixed trend with the industry bellwether HDFC Bank reporting a sluggish growth and higher-than-expected NPAs. While the NPAs continue to remain manageable, concerns over growth have started to surface. ICICI Bank and SBI reported excellent growth and overall better numbers.
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