Domestic equities recovered sharply today mainly of favourable global cues and steady economic data. Notably, sharp recovery in heavy weight financials supported market rally today. We note improved visibility of credit growth on the back of visible rebound in economic activities and comfortable valuations attracted investors towards financials. Additionally, auto, metals and pharma also remained in focus, while FMCG and IT indices contracted. Midcap and smallcap stocks continued to see investors' interests, while volatility index softened over 2.5%. ICICI Bank, HDFC, Axis Bank and Grasim were among top Nifty gainers, while Adani Ports, HCLT, Dr Reddy's and Maruti were laggards.
IIP data for May witnessed strong over 29% growth on base effects, while second wave of impact made it to see ~14% contraction compared to May 2019. Hence, policy support is still much needed to spur economic activities in coming months, and we believe RBI will continue to maintain its accommodative policy in the medium term. Notably, benchmark Nifty appears to be consolidating in the range of 15,600-15,900. However, we continue to believe that any meaningful correction in the market should be taken as an opportunity to get in quality stocks. Strong data from core sector output for May, strong rise in import-export business momentum in June and visible traction in overall economic activities in June indicate healthy corporate earnings for 1QFY22E despite second wave of COVID-19. Further, announcement of slew of measures by Finance Ministry to spur economic activities augurs well. In our view, progress of monsoon, 1QFY22E corporate earnings and COVID-19 positivity rates will be in focus in the near term. Further, higher government's capex and revival in industrials' capex should aid economic recovery. Additionally, minutes of FOMC meeting last week showed that Federal Reserve's substantial progress target for economic recovery has not met yet. Therefore, scaling back of ultra-accommodative policy stance does not look to be imminent in the medium term, which offers comfort to global equities. In our view, higher crude prices, spread of delta plus variant globally and strengthening dollar index could be a near risk for markets. However, underlying strength of domestic markets remains intact, and 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 outperform in FY22E.