The performance of the equity market has improved significantly in the last one month even as the concerns around the rate hikes, inflation and a recession persisted.
Sensex, Nifty and BSE Smallcap indices jumped 9% each in July while the BSE Midcap index clocked a gain of 11%. The overall market capitalisation of BSE-listed firms jumped to ₹266.59 lakh crore from ₹243.74 lakh crore on June 30, making investors richer by ₹22.85 lakh crore in a month.
Analysts point out it was the strongest closing for the market in July in the last 10 years.
On the technical front, Nifty seems to be respecting the level of 15,100. Nifty touched the 52-week low of 15,183.40 on June 17, 2022, and has been witnessing a gradual increase since then. Till mid-July, the market remained in the range of 15,800-16,100 but after the US Fed's 75 bps hike on July 27, the market clocked healthy gains to reclaim the 17,000 level.
Why is the market rising?
One of the biggest factors that supported the market rise is the optimism that the worst is behind us and the US Fed may not lift rates as aggressively as it was anticipates.
"There is some hope that going forward the rate hike may not be too aggressive in the short-term. The US economy contracted again in the second quarter to 0.9% year-on-year (YoY). US economy entering a technical recession may also moderate the aggressiveness of the Fed in hiking the rates," G. Chokkalingam, Founder & Head of Research, Equinomics Research & Advisory, observed.
The return of foreign portfolio investors (FPIs) is also a major factor that has underpinned the market. FPIs had been on a selling spree from October 2021 to June 2022. They turned net buyers last month, As per NSDL data, FPIs invested ₹1,971 crore in the Indian financial market (debt+equity) in July.
The fact that the recent correction had brought the market into an oversold zone also seems to have attracted buying. Nifty is still about 7% down from its all-time high of 18,604.45.
Is the worst behind us?
It is too early to say so. The headwinds - inflation, rate hikes, looming recession and geopolitical tensions - that kept the market under pressure in the last few months, still persist.
Besides, the rupee's precarious health and crude oil prices are also major factors that can puncture the market sentiment.
"US Fed balance sheet reduction plan and oil price would remain as the key risk factors in the short-term. We believe that the domestic markets may rise further for a couple of weeks, however, volatility with a downward bias may return to the markets," said Chokkalingam.
"Till October 2022, we see some concern for the markets. We hope that the US Fed doesn’t increase further its balance sheet reduction plan beyond $95 billion per month after September 2022. Secondly, any further rise in crude oil price would be a short-term risk factor as the domestic economy is still facing a high fiscal deficit, elevated inflation level and falling forex reserve position," Chokkalingam added.
The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) will go into a huddle to decide on policy rates on August 3. Its outcome on August 5 will also influence the course of the market.
Analysts point out that even on the technical front, we cannot say that the worst is behind us. "We still cannot say strongly that the worst is behind us because technically we have closed as strong resistance level of 10-month average on monthly charts of Nifty. If we sustain above the same level in the month of August, then only we can be sure that the worst is over for the market," said Kush Ghodasara, Independent Market Expert.
Any upside left?
Technically, Nifty is likely to face some resistance in the zone of 17,000-18,000 but beyond 18,000, it can rally to 19,000-odd levels.
"Nifty has to face resistance in the 17,700-18,000 area after a stellar bounce back from a lower level, however, once Nifty will take out the 18,000 mark, then we can expect a rally towards 19,000/19,500 levels. On the downside, 16,800-16,650 will act as a strong demand zone at any correction while 16,000 has become the floor for the market," said Santosh Meena, Head of Research, Swastika Investmart.
Ghodasara is of the view that the market may see resistance in the range of 17,400-17,800 in the month of August. Long traders who carried forward positions shall book profits once above 17,300 on Nifty, he said.
What sectors should you bet on?
Chokkalingam said this week the RBI may hike the benchmark rates by 50 bps which could also give some volatility to the markets. So, he suggests periodic short-term profit bookings and a cautious approach to investing in liquid large small, large mid and large-cap, FMCG stocks, S&P 500 ETFs, and also continue to stay invested aggressively in select wealth-creators.
"We also believe that it is time to start accumulating more quality small-cap IT stocks as their valuations turned very attractive and also we expect that, with a lag, the recent rupee fall would ultimately help the IT sector to improve their margins. Also, elevated attrition rates would start moderating within one or two quarters," said Chokkalingam.
Meena is bullish on the domestic economy facing sectors like capital goods, infrastructure, financials, and auto. He expects some value buying in IT and chemical names.
"In August, we should play the strategy - long IT stocks and short banking stocks and play safe," said Ghodasara.
Disclaimer: The views and recommendations made above are those of individual analysts or broking firms and not of MintGenie.