Domestic equities extended gains for the second consecutive day mainly aided by favourable cues from Asian markets. However, it is financials (ex-PSU Banks), which majorly supported market's rally today. Barring Financials and IT, most of the key sectoral indices traded lower. Notably, midcap and small cap indices were down today as investors opted to take profit off the table after recent run-up in these space. Volatility index softened further today by over 7%. SBI Life, Kotak Bank, HDFC Bank and HDFC were among top gainers, while Tata Steel, BPCL, GAIL and IOC were laggards.
In our view, rising crude prices, surge in bond yields and weakening INR could be near term risks for domestic equities, which have already resulted in FPIs' outflow in recent days. However, we continue to believe that recent rise in bond yield is discounting a faster recovery in economic growth and this is unlikely to move northward beyond a point. However, spread of over 470bps between India's GSec Yield and USA Treasury Yield still offers comfort. Given continued rebound in high frequency key economic indicators in Feb'21, we believe underlying strength of domestic equities remains intact despite recent uptick in crude oil prices. Further, likely pick up in capital expenditures in FY22E, impact of new reforms announced in the budget to stimulate consumption activities and higher capex announced by select large states in their FY22 budgets should continue to support ongoing rebound in corporate earnings. Hence, we believe that any meaningful correction in the market should only be creating an opportunity for bargain trading as India continues to offer superior growth prospects. In our views, infrastructure, industrials, engineering, building materials, banks and select auto stocks are likely to outperform in the medium to long term perspective.