Nifty 50 has slipped nearly 2% since mid-February when it touched 15,300 -- the recent high.
The current weakness in stock markets is driven by a spike in US yields.
Nifty 50 has slipped nearly 2% since mid-February when it touched 15,300 — the recent high. However, the fall does not indicate any sharp jump in risk aversion among investors, even though the volatility gauge has spiked 12%, said ICICI Securities in a report. The brokerage and research firm said that the current market movement is more of a consolidation and sector rotation rather than a systematic rise in risk aversion. Nifty and Sensex have now doubled from the March 2020 lows.
Volatility has zoomed 12% since February 16. India VIX – the fear gauge of domestic equity markets – climbed from 21 to as high as 25 during this period. This increase has been termed moderate by ICICI Securities. They highlighted that while Nifty might have slipped 2%, strategies such as high beta, CPSE, smallcaps, midcaps, and dividend yield strategies continue to outperform.
Among sectors, the gainers during this phase include metals, power, energy, media, infra, consumer durables, and PSU banks. Meanwhile, banking space, along with auto, pharma, and telecom were down as the underperformers. Defensives have just mirrored the market.
Rising yields not so bad?
The current weakness in stock markets is driven by a spike in US yields, said ICICI Securities. “The rise in US bond yields is causing volatility in global capital markets over the past two weeks,” they said. However, the factors leading to a surge in yields are positive for stocks unless inflation and yields grow well beyond manageable limits. “In our view, equities as an asset class performs better in an environment of ‘rising growth’ and ‘moderate inflation’,” ICICI Securities said. Consumer price index inflation in January was recorded at 4% while core inflation came in at 5.3%.
Further, the note highlighted that the Reserve Bank of India has still not changed its accommodative stance along with other central banks. This move is likely to help maintain liquidity in the stock market.
Q4 earnings to be strong
Further stock markets are also likely to be helped by the buoyant growth in earnings that is expected to continue in the fourth quarter of the fiscal year. High-frequency indicators for February 2021 indicate fourth-quarter earnings should continue the strength seen over the past 3 quarters given the robust GST collections and on-month expansion continuing for both manufacturing and services PMI at 57.5 and 55.3, respectively,” they said. During the previous quarter, ICICI Securities earlier noted that profits were up 26% on-year for Nifty 50 companies and 37% on-year for Nifty Next 50.