Pre Market views - Oct 21, 2021 - Mr Binod Modi, Head Strategy at Reliance Securities
2021-10-21 09:23:48 (Time Zone: IST)
USA equities mostly extended gains as September quarter earnings rally continues, wherein over 65% of companies managed to beat consensus earnings estimate. However, if we look at bond market wherein bond yield continues to remain elevated above 1.6% levels, soft outlook shared by select companies like Netflix for coming quarters and possible reversal of soft monetary policy of Federal Reserve from next month, it appears that current rally might not sustain, and high volatility can be seen in coming weeks. Further, Federal Reserve's Beige book report published yesterday stated that USA economy is still growing at a solid pace, but labour shortage and supply-chain bottlenecks have been restraining growth and triggering high inflation. This essentially supports arguments of removal of US$120bn monthly asset purchase programme of Federal Reserve in upcoming policy meeting in the beginning of Nov'21.
Domestic equites look to be modestly good as of now. Notwithstanding elevated input costs pressure, September quarter earnings have been encouraging by and large so far with many companies succeeded to beat consensus estimates, which certainly offers comfort. Notably, sharp contraction in CPI print at 4.35% for September despite elevated oil prices and expectations of soft inflations in Oct'21 may continue to aid RBI to continue with its policy support to sustain ongoing growth momentum. Notably, RBI policy meeting outcome in the beginning of month was quite balanced; and it continued to sound dovish despite announcing measure of absorb excess liquidity through VRRR auctions. Further, after India's sovereign rating upgrade by Moody's Investors Services last month, it has now upgraded rating for banking industry from negative to stable in the backdrop of likely pick up in credit growth (10-13% annually) and possible contraction in credit cost, which should offer more comfort to investors. Further, steady rise in disbursal of banks and NBFCs in 2QFY22 (as shown in their provisional numbers reported to exchanges) and sharp rise in Securitization volumes in 1HFY22 vindicate growth momentum of the economy. Additionally, high frequency key economic indicators in September in the form of GST collection, manufacturing PMI, import-export data, railway freight and e-way bills continued to reflect improvement in economic activities, which bode well for corporate earnings. Notably, growth in many cases started surpassing pre-pandemic levels, which also offers comfort. Notably, benchmark indices outperformed global markets in recent period as sustained recovery in key economic indicators and faster vaccination ramp-up with least possibility of third wave of COVID-19 hitting in a bigger way bolstered investors' confidence. Tax collection data for 1HFY21 was also quite impressive, which virtually crossed pre-pandemic FY20 numbers with a wide margin. However, investors remain on tenterhook with regards to progress on Evergrande, rise in USA bond yield and elevated energy prices. In our view, India is at the beginning of capex revival phase and therefore corporate earnings recovery looks sustainable and premium valuations might sustain. Additionally, government's focus to improve credit growth through credit outreach programme and continued traction in PLI schemes augur well for domestic economy. In our view, festive demand, recovery in rural demand, COVID-19 positivity rates, vaccination ramp-up and September quarter earnings will be in focus in the near term. Further higher government's capex and revival in industrials' capex should continue to aid economic recovery in the medium to long term. However, liquidity driven market may take a backseat in 2022 and investors must start focusing on quality aspect of companies, in our view.