Investors should reduce exposure in equities, but IT stocks may continue to outperform
This week, domestic market was mildly positive compared to upbeat Asian peers, which was inclined by better-than-expected Chinese economy data, bounce in tech stocks and importantly Chinese central banks plan to cut bank rate to inject funds in the economy. The India market extended its gains to all-time high supported by rally in IT sector, Reality, Financials and Metals stocks, in anticipation of robust Q1 earnings & recovery in demand. Ease in CPI & WPI inflation on a MoM basis owing to softening of crude oil and food prices did help the market. Compared to this, developed western markets were muted due to high inflation and cautiousness over upcoming Fed policy meet that would likely discuss on tapering, started on July 27-28.
Indian market ended with minor gains compared to the upbeat Asian peers, that rose on better-than-expected Chinese economic data, recovery in IT stocks and most importantly, China's plan to draw down interest rates to boost liquidity.
Indian markets touched all-time high levels in the week gone by supported by IT, metal, financials and realty stocks. Ease in CPI & WPI inflation on a month-on-month basis amid softening of crude oil and food prices also boosted investor sentiment. However, the upside was limited as the developed western markets turned cautious amid high inflation and potential tapering of interest rates in the upcoming Fed policy meet.
On a year-to-date basis, the second wave of COVID-19 has taken a toll on the Asian markets. Also, the crackdown on large Chinese companies, uncertainty in Hong Kong, rising tension between US & China, high inflation and FII selling hurt market sentiment. However, Indian markets have managed to buck the trend in the Asian markets, as observed by the 9 percent seen in Nifty500. This makes us more in line with western markets like Dow Jones & Dax, which are up 16 percent and 14 percent, respectively, in 2021.
A key factor for the Indian market to do well is the sustenance of the global market. Importantly, the outlook for the US market was held positive due to repeated assurance provided by Fed Chair Jerome Powell - that the post lockdown surge in inflation is short-term in nature and not will likely temper their current Quantitative Easing policy. For India, high inflows from MF & retail investors did help to perform better despite FII selling. In the future, despite the rising dominance of India in global trade, a lot will depend on the rally and tone of the direction of developed markets. Domestically, a factor to note will be the level of leverage in the equity market, visible in the increasing funding for IPOs by HNIs.
An important development in the week has been marginally better-than-expected Q1 results for the IT sector. More than the results, the backlog of orders and deals has increased much better, leading to a larger upgrade in outlook. This is leading to an upside in earnings forecasts & stock target price due to a raise in ratings & valuations. Companies are reporting strong growth in Banking Financial Services & Insurance (BFSI), healthcare, retail, and manufacturing Verticals. Businesses in major markets like the US and Europe are showing increased demand for digital transformation, cloud migration, and adopt technologies like Artificial intelligence, Internet of things, Blockchain, etc. The sectors are likely to outperform the market in the short to long-term basis. Investors can increase their exposure in this defensive & high-quality sector, in such a highly valued market, by buying into branded large and mid-caps IT companies.
