Post Market views - June 10, 2021 - Mr. Binod Modi, Head Strategy at Reliance Securities
(Time Zone: UTC)
Domestic equities rebounded sharply today as clarity over vaccination ramp up and government's positive indication towards reviving higher capex programme lifted sentiments. Further, positive cues from Asian markets also supported markets. Financials, Pharma and metals recovered sharply today. Baring Automobile index, all key sectoral indices traded in green. Notably, investors lapped-up midcap and smallcap stocks as improved earnings visibility and widened valuations gap started attracting investors towards midcaps and smallcaps. Bajaj Finance, SBI, Divis's Lab and IndusInd Bank were top Nifty gainers, while Bajaj Auto, Eicher Motors, UPL and Adani Ports were laggards.
While sharp drop in daily caseload and phased withdrawal of business curbs by the states have significantly improved prospects of economic recovery, government's decision of increase MSPs for several Kharif crops is a sensible move to enhance rural income. Further, despite higher fiscal burden (estimated upto Rs1.15 trillion as per sources) due to announcement of extension of free food grains for 80 crore population till Nov'21 and additional expenditure for Jabs, we believe government is unlikely to compromise on capital expenditure programme on account of higher tax collections. Going forward, with opening-up economy at states level, government's higher allocation towards capital expenditures for FY22E should be helpful in driving economic growth in coming quarters. Additionally, various industries have also announced higher capex programme to sustain growth, which should also aid economic recovery. Therefore, notwithstanding some adverse impact on economic activities in 1QFY22E, a sharp pickup in capital expenditures in current fiscal is still on the cards. Hence, earnings recovery in FY22E remains promising. Further, soft bond yields in the USA, recovery in INR and dollar index remaining comfortable in the range of 90 offer additional comfort. This along with improving prospects of earnings visibility has already resulted FIIs' flow to turn favourable in last couple of days. While domestic equites continue to look good, investors must focus on quality stocks with robust earnings visibility and margins of safety. In our view, sectors considered to be major beneficiaries of capex revival are likely to be back in focus in coming weeks. We believe possible rollback of monthly bond buying programme by Federal Reserve and ECB could be a near term overhang for emerging markets.